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The key risk in the Chinese market has arisen from the Shanghai Composite Index's steep run up over the past 12 months. At its peak on 12 June, it was up 151.81% over its year-ago level. Any market that moves up so fast poses a risk. Now it is correcting and is down -24.26% from its 52-week peak.
Several factors fuelled the rally.One, the MSCI announced in early June that it might include Chinese A shares (Shanghai or Shenzen listed shares available for investment only to local investors and by quota to FIIs) in its Emerging Market and Asia Pacific ex-Japan indices.Since this would force internation al ETFs and active funds with exposure to China to invest in these shares, local investors piled into them in anticipation of gains. Second, margin lending provided the liquidity for speculative activity.Third, with real estate and gold not performing and deposit rates down due to the central bank's rate cuts, Chinese investors had no option but to invest in equities. Now the market is correcting owing to its own steep valuation and due to the Greek crisis. The China Securities Regulatory Commission's crackdown on shadow market financing schemes has led to money moving out of equities.
There are four China-focused funds--two from Mirae, one from JPMorgan and an ETF from Goldman Sachs--with a total AUM of `5,247 crore, so the impact of a possible meltdown in the Chinese market on Indian investors will not be massive. Moreover, the steep run up has happened in Chinese A shares while Indian funds invest in Chinese H shares. The latter are shares of companies domiciled in China but listed on the Hong Kong Stock Exchange which foreign investors can invest in freely. H shares have not run up as steeply, nor turned as expensive as A shares. We don't share the concern about China A shares because we don't own them .
Among China-focused funds, those that are more diversified will suffer less than those that are completely focused on China. Some of the China-focused funds have a fund-of-fund structure where the mother fund is dollar denominated. The dollar's strength will cushion the loss these funds suffer in the Chinese market. Finally, if the run up in the Chinese market has caused the weight of these funds to increase, book profits.
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