Chinese chance

By DAILY MAIL REPORTER
Updated: 19:00 EST, 6 February 2004

DRAGONS may be exotic and exciting, but they do breathe fire, a fact that investors should consider before putting money in China.

Past performance looks attractive as the area, currently the manufacturing hub of the world, is booming. Gartmore China Opportunities fund, for example, has turned every £1,000 into £1,800 in the past year alone, figures from data analysts Trustnet show.

But experts warn that, at least in the short term, this may not be repeated as the boom could be nearing a bust.

Christian Dangerfield, manager of the F&C Pacific investment trust, says: 'There are clear signs of overheating. Inflation is up and the economic growth rate in November was 3% up on the year before.'

He added that share prices of the four largest Chinese commodity firms - beneficiaries of the vast building projects across China - quadrupled last year, while property prices in Hong Kong doubled.

But he maintains that these are shortterm teething troubles. In 20 years, China's economy will be the same size as America's, he says, which presents good investment prospects now.

At First State Investments, fund manager Charles Heenan says: 'Share prices are now so much higher that the risks have increased.'

Other problems include several large banks verging on bankruptcy, loss-making government-owned firms and the potential for the SARS virus to reappear.

He adds that Chinese shares can also swing wildly in value because local investors love to gamble with them, rather than making sensible long-term investments. But he, too, believes that in the longer term, these obstacles will be overcome. 'The overall trend is positive over the next two decades, although there will be ups and downs within that period.'

Even though Mr Dangerfield is expecting gains of around 20% this year from the entire Asian region, independent financial advisers are more circumspect.

At IFA Chartwell, Ryan Hughes warns investors to stay away from China unless they can commit money for the long term. He says: 'If you're trying to make quick money, you've missed the opportunity. Longer term prospects are better, but, because it's so risky, investors should save small amounts regularly rather than trying to time a lump sum investment.'

He prefers general Far East funds - such as New Star Pacific Growth - which would include China, rather than a pure China fund which is not diversified and much more risky.

Anyone prepared to take on a rollercoaster ride could consider Gartmore China Opportunities or JPMF Chinese investment trust, he says.

Mark Hinton, at IFA Whitechurch Securities, says those fund managers who can feel the heat are already selling some of their Chinese investments to crystallise profits.

'It is potentially a bubble area, and could drop 20% or so over the next 18 months. 'But on a five to eight-year view, China probably has more potential than anywhere else,' says Hinton.

He suggests general fund First State Global Emerging Market Leaders, or the the firm's pure China fund.

The fund made a gain of 80% in 2003 alone. But it is very risky, as China is still a developing market, which is why Karen put only a small amount into the fund. Karen, who lives in Poole, Dorset, says: 'In the short term, it may not do so well, but over the longer term I think it will be worthwhile.'