Golden China Hedge Fund

Jun 2011, Golden China Fund’s net monthly return was -0.16%, and +3.66% year-to-date. NAV per share of the Fund’s non- restrictive class is US$97.93. During the same period, the monthly and YTD return was -4.51% and -0.80% respectively for the MSCI China Free Index, and -5.21% and -0.91% respectively for the H-share Index. The Fund’s cumulative return since inception (July 2004) is 659.58%, or 33.60% annualized, vs 16.71% of MSCI China Index and 16.60% of H Share index.

As of Jun 30, the largest 5 long positions of the Fund are a media company (ADR), a meat processor, the A shares of an insurer (part of an A-H pair trade with net long of A share), a power plant operator and an internet company (ADR). The largest 5 short positions are a metal company, two developers, the H shares of an insurer (part of an A-H pair trade) and the futures of H shares index. Net exposure of the Fund was 64% at the month-end (slightly raised from 62% at the end of the prior month).

China equities extended May’s decline to June, but started recovering later the month, when an austerity fiscal plan was approved by Greece and some investors started hoping for China’s pause of tightening to avoid a hard landing. We reiterate our view that a hard landing of the Chinese economy is unlikely, based on China’s solid GDP growth of 9.5% YoY for 2Q11 (up 2.2% QoQ), which is higher than market expectations, amid a tightening. Importantly, retail sales accelerated 17.7% YoY in June, while net exports expanded to US$22.2b on weaker imports.

Specifically, retail sales growth was driven by accelerated sales in consumer staples (food, beverage and clothing) and several consumer discretionary segments (home appliance, automobile and decoration materials). Exports and imports grew by 17.9% YoY and 19.3% YoY in June, respectively, resulting in a substantial increase in net exports. Weaker-than-expected imports were mainly due to a slowdown in commodity import volume and a decline in import prices.

And some of the market concerns appears to be overdone, such as the worry about Chinese banks’ exposure to local governments’ financing, as many local governments has (1) implicit fiscal support from the central government’s coffer; (2) strong fiscal revenue; and (3) enormous holdings of assets, such as private equities and A-shares, which can be sold via block trades for loan payments – currently the total market cap of A-shares under local governments or their entities is around Rmb2.7 trillion, and in 2011 until July 11, black trades were done for 111 out of 622 A share companies with stakes held by local governments.
Our concern is more on the following :

(1) Fixed Asset Investment (FAI) continued rising, as industrial output growth accelerated, despite monetary tightening. FAI grew 25.6% YTD in June 2011 (versus 25.8% YTD in May), though dipped 1.04% MoM; (2) Real estate sector’s sales growth remained high at 32.9% YTD in June (versus 33.0% YTD in 1Q11); and (3) CPI in June reached a new high at 6.4% YoY, and was up 0.3% MoM (versus 0.1% MoM in May), largely due to a 0.9% MoM increase in food CPI.

However we believe the inflation in China should trend down in the second half of 2011 and stay at a moderate level for a while, which should be favorable for equity investments.

We therefore had slightly increased the Fund’s net exposure in July and started accumulating some value stocks with decent growth.

In terms of equity valuation, on 12-month forward basis, MSCI China are currently traded at around 10.1x P/E and 1.7x P/B as of June 15, with the P/E slightly higher than the 10.0x level on June 20.


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