Equity funds in China posted an average gain of 4.36% in April, bringing the gain in the first four months of the year to 30%, according to data provider Lipper. Thanks in large part to the improvement in investor sentiment worldwide, China equity funds have also been lifted, allowing then to partly recover from their 53% average loss in 2008.

Xav Feng, Taipei-based head of research for China and Taiwan at Lipper, cautions investors not to be carried away by the continued gains in China equity funds, however, particularly due to the potential impact of the swine flu scare.

"China's economy continues to show positive signs amid the global financial crisis, but it still faces big challenges," Xav says. "The swine flu outbreak is further clouding prospects for a global economic recovery, and investors should be aware of this systemic risk and not treat it lightly."

Qualified domestic institutional investor (QDII) funds rose by an average of 11% in April (same as March), while rising 11.8% on average for the first four months of the year. The QDII programme allows institutional investors to move funds overseas as part of the liberalisation of China's capital account.

The best performing QDII funds for April were: China International Asia Pacific Advantage Fund (+15.14%), Fortis Haitong China Overseas Best Selection Fund (+13.98%), and ChinaAMC Global Equity Selection Fund (+12.41%). For the year-to-date period, Fortis Haitong China Overseas Best Selection Fund (+21.25%), China International Asia Pacific Advantage Fund (+15.14%), and ChinaAMC Global Equity Selection Fund (+13.69%) were in the lead.

With the recovery of the capital markets, the China Securities Regulatory Commission -- which suspended approval of new QDII funds in the second half of 2008 -- recently granted QDII qualifications to ABN Amro TEDA Fund Management Company, which is a Sino-Dutch joint venture. That increased the number of fund houses with QDII licenses to 29.

Qualified foreign institutional investor (QFII) funds posted an average gain of 5.6% in April and 34% for the first four months of the year.

The total number of QFII approvals stayed unchanged at 79 participants. Pru AM China Mainland Equity H Class and JF China Pioneer A-Share took the lead among all QFII funds with returns of 10.83% and 7.25%, respectively. The actively managed QFII funds outperformed for the month with a return of 5.87% on average, while passively managed funds posted 3.73% on average. Overall, for the year-to-date period, QFII A funds posted a return of 33.97%, surpassing all domestic types.

The total net assets of all QFII funds rose by 4% to $8.20 billion in April. Nikko China A Share Fund 2 gained 9.95% and had the largest percentage of net buying among all QFII funds.

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.

Looking ahead, Xav believes the international economic downturn is easing, investor sentiment is recovering, and global markets have started to rebound significantly.

Although global sentiment is turning optimistic, he notes that the swine flu epidemic continues to grow as governments have made pandemic preparedness and contingency plans against it. Similar to the Asia region's experience with the Sars outbreak in 2003, which caused severe economic woes and losses of life, the swine flu outbreak is further clouding prospects for a global economic recovery, he says.

China's own challenges, meanwhile, include its 6.1% growth in GDP in the first quarter of 2009, which is its weakest quarter on record and lower than the 6.8% expansion in the fourth quarter of 2008, Xav says.

Average performance of fund groups in China in April:

  • Target Maturity +4.40%
  • Equity China +4.36%
  • Mixed Asset CNY Flexible +4.12%
  • Mixed Asset CNY Aggressive +3.87%
  • Mixed Asset CNY Balanced +3.63%
  • Mixed Asset Other Conservative +1.94%
  • Guaranteed +0.15%
  • Money Market CNY +0.09%
  • Bond CNY +0.05%

Top performing QFII funds in April:

  • Pru AM China Mainland Equity H Class +10.83%
  • JF China Pioneer A-Share +7.25%
  • PCA China Dragon A Share Equity A-1 Class C +6.83%
  • Shenyin Wanguo-Aizawa China A-Share Fund +6.74%
  • APS China A Share +6.56%
  • Shenyin Wanguo-Aizawa China A-Share Fund +6.11%
  • Morgan Stanley China A Share Fund +5.81%
  • Shenyin Wanguo-Aizawa China A-Share Fund +5.49%
  • Nikko China A Share Fund +4.57%
  • Nikko AM China A Stock Fund +4.49%
  • Hang Seng China A-Share Focus +4.09%
  • W.I.S.E. - CSI 300 China Tracker +3.98%
  • iShares FTSE/Xinhua A50 China Tracker +3.48%