As of end March, 67% of Japan and Asia fund management specialists find that China is a source of growth on the region, according to the latest monthly Merrill Lynch survey of global fund managers.

Perhaps not surprisingly, Asia fund managers have been incredibly bullish, with now 80% saying China is a positive factor. But so are Japanese managers, with 53% agreeing.

Moreover, more Japanese managers expect China's economy to grow over the next 12 months than their Asia counterparts. While 20% the net response among Asia specialists expected Chinese rates of growth to decelerate, a net 53% of Japan specialists believe Chinese rates of growth will increase.

But while a majority of Japan managers have a consistently optimistic view, Merrill Lynch has recorded a much more volatile frame of mind: in February, 68% of Japanese managers favoured China, while only 47% agreed in January.

And while the majority of Japanese managers think China is a source of growth, 26% also consider it a deflationary threat.

Merrill surveyed 19 Japan specialists managing $28 billion and 20 Asia specialists managing $31 billion.

Looking at their respective areas of investment, Japan managers are becoming somewhat more bullish on their market compared to their Asia counterparts. Both agree their stock universes are undervalued, and a whopping net 58% of Japan managers expect better profits from Japanese companies.

"In Japan, fund managers expect a weaker macro outlook," says Stephen Corry in Hong Kong, the author of the report, "and yet a higher number of respondents (56% versus 46% last month) forecast better earnings in the next 12 months. The one-year projected growth rate has risen from 5.0% to 7.2%." With the alignment of higher earnings expectations and falling equity markets, a 63% of Japanese fund managers think the market is undervalued.

The view is positive in Asia as well but not to the same degree. A net 35% of Asia managers believe Asian corporate profits will rise. Although cash positions in Japan have risen from 4.1% in February to 4.4% in March, with 26% of managers now overweight cash, the Asia managers have much higher cash levels of 5.9%, with 35% overweight. This is counter to the global trend, where cash levels are beginning to fall, according to Merrill Lynch.

"Lower economic and inflationary expectations have led fund managers [in Asia ex-Japan] to lower their earnings expectations," says "Fund managers now believe earnings will grow 7.5% over the course of the next 12 months (versus 9.4% last month). To reflect the weaker macro outlook, cash levels have risen to 5.9%."

For Asia managers, Thailand and China were favourite markets last month, with India third. The dogs were the Philippines and Hong Kong.