Tony Griffiths

22/06/2011 Author: Tony Griffiths

China investing is only for the brave, or the Ucits

Prompting both excitement and debate, China’s growing economic might has created a widening dichotomy between those keen to ride the dragon’s back and those fearful of getting burned.   

Recent developments would certainly seem to advise erring on the side of caution. News this week that Paulson's Advantage fund had taken an almighty hit centred largely on the firm’s investment in a Toronto-listed Chinese forestry firm recently accused of fraud.

Renowned China sceptic Jim Chanos remains bearish on Chinese companies listed in the US. Many agree. A growing distrust of Chinese companies saw the Bloomberg Chinese Reverse Mergers Index plunge around 40% between June 2011 and November 2010.   

This is only one side of the story of course. China’s consumption story is strong and an internal focus has been paying dividends. China-based Galaxy Asset Management’s Special Situations Fund is up 25.52% YTD, implementing a reverse merger strategy focused on China-listed companies with strong growth prospects.

“The regulations for doing reverse mergers in Hong Kong are a lot more stringent than those in other overseas markets,” says Galaxy portfolio manager Joseph Chu. Normally the better quality ones opt for a Hong Kong listing.”
Merrill Lynch (via its MLIS Ucits platform) and Pictet Asset Management have both shown fresh interest in China-focused Ucits strategies – Galaxy is currently working on its second.

While a cautious consensus is growing about Chinese firms moving overseas, a converse one is forming about the country’s domestic market, and whether by Ucits or otherwise, regulatory reassurance appears to be taming the beast.

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