International Fund Managers Begin to Pare Back on China Exposure

A number of managers of international and emerging markets mutual funds who had invested heavily, and successfully, in China are now cutting back on their holdings, the Associated Press reports.

Noting that China’s domestic A shares have risen nearly 500% in the past two years, Justin Leverenz, manager of the Oppenheimer Developing Markets Fund, said he expects the bubble to burst soon—and fast. “2008 will be an incredibly difficult year for Chinese equities,” Leverenz said. The market is in the “later, waning stages of a bubble,” he added.

Although Antoine van Agtmael, chief investment officer of Emerging Markets Management, believes in economic growth in China, he says the stock market there has been clouded by a buying frenzy. Van Agtmael, who is credited with coining the term emerging markets, has been so nervous about the Chinese market for a while now that he cut back on his holdings quite some time ago, which he now regrets as being too hasty.

“I don’t trust this phenomenal rise in the A share market and now the H share market [on the Hong Kong exchange] at all,” van Agtmael said. “Like all bubbles, it will end in tears. I believe this is going to be sooner rather than later,” he said, estimating that the market could fall as much as 70%.

One data point that troubles van Agtmael in particular is China’s GDP growth rate. Over the past 20 years, it has averaged between 8% and 10% but recently rose to 11%.

Six of the top 10 best-performing funds so far this year through Nov. 20 have a China focus, the No. 1 fund, AIM China A, up 86.12%, according to Morningstar.

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