China Stocks Touch 7-Year High: 2 Mutual Fund Picks

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Includes: FHKCX, MCHFX
by: Zacks Funds

Stocks in China jumped to the highest level in seven years today. The prospect of further reform measures from the government was the major reason for these gains. This is yet another record set by the country's benchmark, which has gone from strength to strength this year. Despite the volatile nature of markets recently, and fears that stocks may be overvalued, the country's bull run continues unabated.

Reform Measures

The latest trigger for the market's upward movement was speculation that the government may merge state-owned companies. The number of such companies that are centrally controlled may be reduced from 112 to 40, utilizing a variety of measures. This includes options such as restructuring and merging some companies.

Additionally, there are indications that other steps may be taken to boost economic growth. Several such measures have already been taken this year, especially those aimed at boosting the country's flagging property market. Reportedly, the central bank is now considering other innovative measures to stimulate growth. These measures include open market purchases of bonds issued by local government bodies.

Regulatory Action

At the same time, the country's securities regulator has taken several measures to reduce speculation-based trading. Last week, China's securities regulator unveiled measures to control the use of shadow financing to purchase stocks. In addition, the use of "umbrella trusts" by margin trading units of brokerages was banned. Meanwhile, fund managers have been allowed to lend shares for short selling.

On Friday, the securities regulator said it has speeded up efforts to drastically reduce any manipulation of equity markets, including insider trading. According to a statement on the regulator's website, it will crack down on any dubious activities, including accounting fraud and individuals profiting from trading using insider information.

The fact that such measures are being taken simultaneously is particularly heartening. On one hand, the government is utilizing a combination of monetary measures and structural reforms to boost the economy. On the other hand, the securities regulator is acting to control speculation, often at the cost of temporary losses, to prevent the buildup of bubbles and protect the interests of individual investors. This increases the prospects of the market continuing to move upward in the days ahead.

China Mutual Funds

Here we will list 2 top China mutual funds that carry a Zacks Mutual Fund Rank #2 (Buy), as we expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but on the likely future success of the fund.

These funds also have proven impressive performance, as they have a minimum 29% return over the past one year and a minimum return of 24% year-to-date. The funds have relatively low expense ratio, and carry no sales load. The maximum initial investment required is $5000.

Fidelity China Region Fund No Load (MUTF:FHKCX) seeks long-term capital appreciation. The fund invests a large share of its assets in equity securities of companies whose principal operations occur in the Greater China Region. A maximum of 35% is invested in industries that account for over 20% of Hong Kong, the Taiwanese market, and the Chinese market. Factors such as financial strength and economic conditions are considered to invest in a company.

FHKCX carries a Zacks Mutual Fund Rank #2 (Buy). The fund returned 33.3% over the past one year, and has a year-to-date return of 24.4%. It carries an expense ratio of 1.01%, as compared to the category average of 1.78%.

Matthews China Fund Inv (MUTF:MCHFX) invests a lion's share of its assets in common and preferred stocks of China-based companies. This also includes companies located in Hong Kong and other Chinese-administered regions. It seeks capital growth over the long run.

MCHFX carries a Zacks Mutual Fund Rank #2 (Buy). The fund returned 29% over the past one year, and has a year-to-date return of 24.7%. It carries an expense ratio of 1.11%, as compared to a category average of 1.78%.