Feb. 16, 2007 (China Knowledge) – Last week, China’s 53 fund management companies released their fourth quarter reports of 278 funds. These reports revealed that the funds are continuing to invest in real estate and financial stocks, which are widely believed to be overheating, and thereby creating a bubble.

Being the largest institutional investors, the huge amount of investment funds has brought about excessive liquidity, which in turn led to the bull run on the stock market. Most fund managers agree that the valuation of real estate and financial stocks are too high, yet they are still keen on investing on these stocks.

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Highlights of the report:

- The bullish Mainland stock market has helped the continued expansion of China’s fund industry in the fourth quarter of 2006. According to quarterly reports, 278 funds reported a net income of RMB 54.15 billion in the fourth quarter of 2006, a record high for quarterly net income. Besides, the first three quarters of net income in 2006 were RMB 13.83 billion, RMB 40.97 billion and followed by RMB 15.87 billion.

- In 2006, pure equity and equity-oriented funds, rather than money market funds, dominated the market. According to quarterly reports, active allocation funds (equity-oriented funds), equity funds and closed-end funds reported a net income of RMB 18.59 billion, RMB 17.91 billion and RMB 15.97 billion respectively.

- For assets invested in equity markets, it is not surprising that finance and insurance was the largest sector during the last quarter of 2006, when the Mainland stock market grew rapidly, led by financial and real estate stocks. During the fourth quarter, financial stocks rose by 78% while real estate stocks increased by 57%.

- Metal and nonmetallic mineral products (RMB 56.38 billion equities held) was another preferred sector for fund investment, accounting for 10.22% of total assets under management as at the end of 2006. Iron and steel stocks like BaoSteel, Wuhan Iron & Steel, Angang, Taiyuan Steel are regularly featured in the portfolio of investment funds.

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