China equity funds posted an average gain of 3.89% in May, bringing the gain in the first five months of the year to 35.22%, according to data provider Lipper.

Xav Feng, Taipei-based head of research for China and Taiwan at Lipper, notes that the continued improvement in sentiment is due largely to the growing confidence in the mainland economy. He continues to advise that investors not get carried away by recent gains though, because China's economy is not yet entirely out of the woods.

"China's economy is still well on track for recovery and is continuing to expand moderately on its massive stimulus programme but is not yet out of the storm," Xav says.

China's recovery remains heavily dependent on domestic demand, but China's exports in May fell 26.4% from a year earlier to $88.8 billion, worse than expected. While new export orders improved, China's purchasing managers' index (PMI) fell slightly to 53.1 from the 53.5 of April, the third straight month above the threshold of 50 that separates expansion from contraction. China's value-added industrial production accelerated to 8.9% in May from a year earlier, higher than April's 7.3% rise.

Qualified domestic institutional investor (QDII) funds rose by an average of 12.18% in May, while rising 26% on average for the first five months of the year. The QDII programme allows institutional investors to move funds overseas as part of the liberalisation of China's capital account.

Fortis Haitong China Overseas Best Selection Fund (+19.71%), ICBCCS Global China Opportunity Equity Fund (+13.81%), and Harvest Oversea China Equity Fund (+13.29%) were the best performing QDII funds for May. For the year-to-date period, Fortis Haitong China Overseas Best Selection Fund (+45.15%), BOCOM Schroders Global Selection Fund (+28.97%), and ICBCCS Global China Opportunity Equity Fund (+28.96%) were the top performers.

Qualified foreign institutional investor (QFII) funds posted an average gain of 4.43% in May and 34.96% for the first five months of the year.

QFII A-share funds rallied to a return of 4.43% on average for May, outperforming the domestic equity fund group. Nikko AM China A Stock Fund and Nikko China A Share Fund 2, with returns of 8.89% and 8.87%, respectively, took the lead among all QFII funds

The total net assets of all QFII funds rose a slight 3.52% to $8.74 billion in May. Nikko China A Share Fund 2 gained 9.15%, but most QFII funds had net redemptions instead of net buying.

China launched the QFII programme in mid-2003 to allow approved foreign institutions to trade A-shares and bonds on the Shanghai and Shenzhen exchanges. The programme was part of the government's efforts to open China's capital market and ease controls on the capital account, under which the yuan isn't fully convertible.

Average performance of fund groups in China in May:

  • Equity China +3.89%
  • Mixed Asset CNY Aggressive +3.56%
  • Mixed Asset CNY Balanced +3.22%
  • Mixed Asset CNY Flexible +3.22%
  • Mixed Asset Other Conservative +1.93%
  • Target Maturity +1.92%
  • Bond CNY +0.89%
  • Guaranteed +0.81%
  • Money Market CNY +0.10%

 Top performing QFII funds in May:

  • Nikko AM China A Stock Fund +8.89
  • Nikko China A Share Fund 2 +8.87
  • Pru AM China Mainland Equity H Class +5.81
  • Morgan Stanley China A Share Fund +5.23
  • Shenyin Wanguo-Aizawa China A-Share Fund No 1 +4.37
  • Lyxor China A Fund +4.34
  • Shenyin Wanguo-Aizawa China A-Share Fund No 2 +3.39
  • APS China A Share +2.94
  • PCA China Dragon A Share Equity A-1 Class C +1.96
  • Shenyin Wanguo-Aizawa China A-Share Fund No 3 +1.92
  • ABN AMRO China A Share Fund +1.02