As speculation grows, investor

By Wang Xinyuan

Deutsche Bank (DB) said in a hedge fund survey Wednesday that China can expect to see a robust inflow of investment in 2010, while analysts said that the hot money inflow – spurred by speculation on the yuan's appreciation – is driving an asset price bubble, despite tight financial control.

The investment bank released the results of its annual alternative investment survey Wednesday, which was conducted in January, covering 600 institutional and individual investors representing $1 trillion in hedge fund assets worldwide. The respondents identified Asia, excluding Japan, as the region expected to perform best in 2010, while China is expected to be the top-performing country.

"Our survey shows that investors plan to act on this positive outlook, with investor inflows to the region expected to be robust this year," said Harvey Twomey, head of global prime finance for Asia Pacific in the institutional client group at DB.

"In 2009, the hedge fund industry experienced its best annual performance in a decade, and investors predict continued strength in 2010," said Barry Bausano, DB's co-head of global prime finance.

Investors expect new hedge funds to grow $222 billion worldwide this year, and bring the total amount of hedge funds assets under management to approximately $1.72 trillion by 2011, stated the report.

Over 75 percent of the respondents now have investments in China, with 26 percent planning to add more, the report said.

This means hot money will continue to swarm into China aiming to profit from the Chinese yuan's appreciation and rising property prices, said Ding Jianping, a finance professor at Shanghai University of Finance and Economics.

With the recovering economy, about $122 billion in hot money flowed into China in the second quarter of last year. The rise corresponded with the hike in the Chinese stock market and also housing price spikes in major cities.

"The hot money bets on two gains," Ding said. "They bet that the Chinese yuan will appreciate against the dollar in a matter of time, so they will profit by converting back to the dollar after the appreciation. They also expect to have higher returns on the Chinese housing market."

Although the high price of housing was the top issue addressed during the recent annual parliamentary meetings, there was no substantial or fundamental change to drive down the already skyrocketing property prices, Ding said

Some State-owned enterprises which are controlled by the central government recently posted new highs in prices paid for investment properties, while local governments' fiscal revenue still relies on income from selling land to property developers. Those factors have not fundamentally changed, so foreign investors have good reason to expect a profit from investing in China's property market, Ding said.

There are many underground ways for hot money to sneak into China. One is that outbound hot money can be invested in the Chinese housing market through foreign-funded enterprises operating in China, which can put their year-end yuan profit into the real estate sector.

The hot money inflow will also push the domestic property price even higher, leading to asset bubbles, Ding said.