China's 104 mutual funds returned to profitability last year as a result of the upsurge on steelmaking, petrochemical and auto stocks, which they bought into heavily amid optimism that China's booming economy would be translated into profit growth for these companies.

The mutual funds, which manage around 160 billion yuan (US$19.28 billion) of combined assets, posted an aggregate return of 929 million yuan last year, compared with a loss of 3.64 billion yuan the year before, according to the summary report of the funds' annual reports.

The 10.57 percent gain on the A-share markets in Shanghai and Shenzhen, led by companies with business in steelmaking, petrochemical, auto manufacturing and power supply companies, helped the mutual funds to make a turnaround after losses for two consecutive years.

"In China, the yardstick measuring the performance of mutual funds is quite simple: so long as they can make money for investors," said analyst Lu Liang with China Securities Co Ltd. "Investors here do not care as much whether funds outperform the market or not, as foreign investors do."

The mutual funds invested heavily in companies with large capitalizations, such as Baoshan Iron and Steel Co Ltd and China Petroleum and Chemical Corp, since last year, betting that China's breakneck economic growth would fuel the demand for raw materials and boost profitability of these companies.

That highlighted a shift in the equity investment strategy in the domestic stock markets with small-caps falling from favor. That is a segment which often saw share prices shoot up due to their easier exposure to manipulations.

"Share prices did not match the growth potentials for these companies," said analyst Dai Ming with Fucheng Securities Co Ltd. "Fund managers got it right for not investing in such stocks. Steelmaking, petrochemical and auto manufacturers are all cyclic stocks, which means that the benefits of the economic growth can be shared for investing in these firms."

With china's economy growing by 9.1 percent last year, the demand for raw materials surged as the country needed more oil to fuel power stations and factories as well as more steel for auto making, translating into the fast earnings growth for listed firms representing these sectors.

For instance, Baoshan Iron and Steel reported a 64 percent earnings increase for 2003, justifying a 72 percent gain on its share price last year.

(Eastday.com April 1, 2004)