Chinese mutual funds cut their recommended exposure to stocks while increasing bond holdings amid concern over inflation and further monetary tightening, a Reuters poll of fund managers for July showed. Mounting concerns over local government debt and a deadly train crash last week that killed 39 people have sapped fund managers' appetite for financial and transportation stocks, it showed.
The average suggested equity weighting over the next three months fell to 84.5 percent from an eight-month-high of 85.6 percent last month, reflecting reduced appetite for risky assets, according to the poll of eight China-based funds conducted this week. Meanwhile, they raised their suggested exposure to bonds to 6.3 percent of the portfolio from 5 percent last month, while recommended cash holdings fell slightly to 9.3 percent from 9.4 percent.
An end to the current tightening cycle poses the biggest buying opportunity for stocks, said a Shanghai-based fund manager who declined to be identified. "But you cannot rule out the risk of stagflation, with growth slowing but consumer prices still hovering high," he added.
China's economy has already shown signs of cooling after the government raised interest rates three times and urged banks six times to set aside more cash as reserves this year to tighten excessive liquidity.
China's consumer price inflation rose to 6.4 percent in June to the highest level in three years, but is widely expected to be near its peak, bolstering expectations that future monetary tightening measures would be limited. However a more balanced growth is not yet in sight due to the structural problems inherent in the economy.
The fund managers polled forecast on average the benchmark Shanghai Composite Index would rise to 2,856 points in three months, down from a predication of 2,921 points made last month.