China Stocks Not Cheap Enough Yet for KBC Goldstate, CIO Says

By Chua Kong Ho

July 2 (Bloomberg) -- China's stocks, trading at the lowest valuations in almost two years, still aren't cheap enough for KBC-Goldstate Fund Management Co. to raise its equity holdings because inflation may erode company profits.

KBC-Goldstate, a venture between Belgium's KBC Asset Management NV, China's Goldstate Securities Co. and Capital Airport Holding Co., has cut the holding of equities in its $609 million Momentum Investment Fund to less than 11 percent, said Chief Investment Officer Lode Vermeersch. He declined to be specific about the fund's assets, which include bonds and cash.

``We're searching for answers,'' Vermeersch said in an interview today, when asked whether his Shanghai-based company will increase its stock holdings. ``At this moment, there's a need for a lot of consideration before we take a position.''

The CSI 300 Index, which tracks yuan-denominated stocks in Shanghai and Shenzhen, has slumped 49 percent this year, the most among benchmark indexes in the world's 20 biggest equity markets, amid concern government measures to curb inflation will hurt company profits.

The tumble followed a sixfold surge in the two years through 2007 that took valuations to 53 times reported earnings on October 16, when the CSI 300 closed at a record. The ratio has since declined to 20 times, the lowest since August 2006.

``Of course valuations are attractive compared to October,'' Vermeersch, 44, said. ``Are they attractive enough? That's hard to answer.''

KBC Goldstate as of March 31 had 11 percent of the $609 million Momentum Investment Fund in stocks 45 percent in bonds and 44 percent in cash, according to its quarterly fund report.

Inflation, which climbed to 8.1 percent in the first five months of this year compared with 4.8 percent for all of 2007, could affect the ability of companies to pass on higher costs, Vermeersch said. Slowing global growth will also cut demand for Chinese exports, while consumption could decline if wages can't keep up with price increases.

``Most investors are waiting for the quarterly earnings reports to come out to give some indicator whether profits have worsened or are in line,'' Vermeersch said.

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at Kchua6@bloomberg.net