China equity funds posted an average gain of 14.07% in July, bringing the returns in the first seven months of the year to 72.42%, according to data provider Lipper.

All this is before the sell-off in August, however. China's closely watched CSI 300 Index, which tracks the 300 most representative A-share stocks listed on the Shanghai and Shenzhen Stock Exchanges, was up 4.3% yesterday, but is still 17% off its recent peak on August 3. The sharp fall in the Chinese stock market in previous days was mainly due to worries about the potential for imminent policy tightening in the mainland. China's economic data for July was reasonably strong, but a sharp fall in bank lending stoked fears that liquidity could dry up in the second half.

Xav Feng, head of research for China and Taiwan at Lipper, notes that China's annual GDP growth accelerated in the second quarter to 7.9% from 6.1% in the first quarter, making China the best performing major economy and reinforcing hopes that the world is pulling out of recession. He adds that China looks set to hit its full-year growth target of 8% after a surprisingly strong second quarter, notable for a surge in investment driven by powerful fiscal and monetary stimuli. Plus, China's purchasing managers' index (PMI) rose to 53.3 in July from 53.2 in June, exceeding the boom-bust threshold of 50 for a fifth straight month and reflecting strength in output. However, on the downside, China's exports in July fell 23% from a year earlier and for a ninth straight month on a year-on-year basis. In the January-July period China's exports fell 22% from a year earlier.

Xav believes that investors should be cautious when putting more money into China shares.

"China market's rally has fully reflected optimistic expectations for China's economic recovery, and investors should be wary of a market correction in the future," he says.

Meanwhile, qualified domestic institutional investor (QDII) funds in China rose by an average of 10.02% in July, while rising 44.21% on-average for the first seven months of the year. The QDII programme allows institutional investors to move funds overseas as part of the liberalisation of China's capital account.

BOCOM Schroders Global Selection Fund, China International Asia Pacific Advantage Fund, and ICBCCS Global China Opportunity Equity Fund were the best performing QDII funds in July, with returns of 12.06%, 10.91%, and 10.87%, respectively. For the first seven months of the year, Fortis Haitong China Overseas Best Selection Fund (+67.79%) was the best performing QDII fund.

Qualified foreign institutional investor (QFII) funds posted an average gain of 14.53% in July and 87.06% for the first seven months of the year.

Among the leaders in July were Schroder China Equity Fund, iShares FTSE/Xinhua A50 China Tracker, W.I.S.E.-CSI 300 China Tracker and Invesco China Opportunity Fund I, with returns of 20.76%, 17.19%, 16.17%, and 15.60%, respectively. Passively managed QFII funds, with a return of 16.01% on average, outperformed for the month, while actively managed funds posted 14.07% on average. The total net assets of all QFII funds rose 4.52% to $10.65 billion in July, but most QFII funds faced net redemptions rather than net buying, signalling that overseas investors were cautious and starting to take profits.

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.

The China Securities Regulatory Commission granted a QFII license to Korea Investment Trust Management in July, bringing the total number of QFII approvals to 86 participants.

Average performance of fund groups in China in July:

  • Bond CNY +2.51%
  • Equity China +14.07%
  • Guaranteed +5.05%
  • Mixed Asset CNY +13.07%
  • Mixed Asset CNY Balanced +10.90%
  • Mixed Asset CNY Flexible +11.70%
  • Mixed Asset Other Conservative +7.36%
  • Money Market CNY +0.13%
  • Target Maturity +10.97%

Top performing QFII funds in July:

  • Schroder China Equity Fund +20.76%
  • iShares FTSE/Xinhua A50 China Tracker +17.19%
  • W.I.S.E. - CSI 300 China Tracker +16.17%
  • Invesco China Opportunity Fund I +15.60%
  • Morgan Stanley China A Share Fund +15.58%
  • W.I.S.E. - SSE 50 China Tracker +15.55%
  • Lyxor China A Fund +15.28%
  • Nikko Listed IDX Fund China A Share (Panda) CSI300 +15.12%
  • Invesco China Opportunity Fund II Class A +14.92%
  • Nikko AM China A Stock Fund +13.95%
  • Nikko China A Share Fund 2 +13.85%
  • Pru AM China Mainland Equity H Class +13.50%
  • APS China A Share +13.06%
  • ABN AMRO China A Share Fund +12.92%
  • PCA China Dragon A Share Equity A-1 +11.20%
  • Hang Seng China A-Share Focus A1 +11.17%