January 23, 2018 / 8:11 AM / 9 months ago

China state-backed funds slash equity exposure amid market euphoria

SHANGHAI, Jan 23 (Reuters) - China’s five state-backed mutual funds, launched during the 2015 stock market crash, cut their equity holdings in the fourth quarter as they reduced exposure to the banking and manufacturing sectors, latest filings show.

The share reduction by the five hybrid funds, which currently manage a combined 250 billion yuan ($39.1 billion) on behalf of the government, has triggered speculation of an exit, as China’s blue-chip CSI300 Index hit the highest level since July, 2015, when these funds were set up to stem market slides.

“These funds were launched to rescue the market, not to make money. Sooner or later, the money needs to be returned, and I suspect the funds are heading toward an exit,” said Yang Hai, strategist at Kaiyuan Securities.

The funds’ moves contrast with that of many other mutual funds who remain bullish about the stock market. Sustained interest toward financial shares pushed Industrial and Commercial Bank of China (ICBC) up as much as five percent on Tuesday, briefly dethroning JPMorgan Chase as the world’s largest bank.

One of the state-backed funds, China Southern Consumer Vitality Flexible Fund, cited tighter liquidity as a reason for caution in its newly-published quarterly report.

China’s economic fundamentals were “neutral” to the equity market, while interest rate conditions had a negative impact on stocks, fund manager Shi Bo said.

The fund, which slashed its equity holdings to 24.2 percent from 32.3 percent during the fourth quarter, and nearly halved its exposure to financials to 5.3 percent, said it would continue to take a “neutral” position on equities, with a focus on blue-chips with low valuations.

Other state-backed funds, including ChinaAMC New Economy Flexible Fund, E Fund Ruihui Flexible Fund, Harvest New Opportunities Hybrid Fund and CMF FengQing Flexible Allocation Fund, all cut their equity exposure while boosting their holdings in cash and fixed-income instruments.

CMF FengQing, for example, nearly halved its equity exposure to 7.47 percent, with ICBC disappearing from its top 10 stock holdings list.

The Harvest New Opportunities fund slashed its stock holdings to 19.1 percent from 26.8 percent. Its exposure to manufacturing and financial sectors more than halved.

Kaiyuan analyst Yang said investors should not follow the strategy of state-backed funds. He still sees upward momentum in financials, saying investors cornered by a tough crackdown on shadow banking will seek safe, liquidity assets and banking stocks are an ideal place to park money.

“The government is closing the door for shadow banking investment, but the gate of the stock market is wide open.”

$1 = 6.3970 Chinese yuan Reporting by Samuel Shen and John Ruwitch; Editing by Jacqueline Wong

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