2007 Outlook for China Mutual Funds Rocky

Although mutual funds that specialize in China delivered outsize returns last year—and Chinese investors have placed enormous sums in stocks and funds over the past year and a half—the market so far in 2007 has been so volatile that some fear it could be headed for the same fate as the dot-com bubble, the Associated Press reports.

“Those companies are just like the companies that came out of Silicon Valley from 1995 to 2000,” said Donald Straszheim, vice chairman at Roth Capital Partners. “Some are going to sink. Some are going to swim.”

Stocks in China soared more than 130% in 2006, but in recent weeks, shares on the Shanghai Stock Exchange have been exceptionally volatile, and regulators at the exchange have said the markets are overheated.

But given the tremendous run-up last year, volatility shouldn’t be a surprise, said Arijit Dutta, an analyst with Morningstar. “Generally, we tend to discourage people from investing in a single-country fund. Many investors may not be able to stomach the ups and downs and end up using the funds badly by buying at the wrong time and selling at the wrong time.”

Still, the outlook for China’s economy is very strong. Liang Zhou, a research manager at Lipper, expects the economy to grow 10% annually for the next few years. Nonetheless, he still foresees volatility in the markets, particularly because Chinese investors are not sophisticated and are likely to chase returns, and regulations governing mainland exchanges are not as strict as in developed countries.

“The markets run on rumor, and the regulatory regime is still not fully developed,” Zhou said.