China's crash hurts China, Asia and EM funds

The technology-heavy Shenzhen Composite fell 8 per cent, China's CSI 300 index fell 7 per cent before shares were suspended from trading on Monday, and the Shanghai Composite index fell 6.9 per cent on the day. The falls - some of the worst since China's Black Monday in August 2015 - come on the back of more disappointing domestic data and the impending end of a ban on stock sales by large shareholders.

Although on Tuesday the government announced it was to pump Y130bn into the economy indices, stocks and funds struggled to pare back earlier losses. Fidelity China Special Situations (FCSS) was down 4.9 per cent by midday on Monday, and by midday on Tuesday had ticked up only 0.73 per cent. Exchange- traded funds (ETFs) tracking the CSI 300 index had dropped by almost 10 per cent before the close of play on Monday, but made up some ground on Tuesday.

Emerging markets and Asian funds were among the worst affected over the short term. Over Monday Scottish Mortgage (SMT) lost 4.6 per cent - it has more than 10 per cent invested in China - and Baillie Gifford Emerging Markets Growth (GB0006017825) lost 3.2 per cent.

However, for UK investors the situation is not as bad as it seems. China's domestic 'A' share market, which is at the eye of this storm, is not the first port of call for fund managers, who generally invest in Hong Kong-listed 'H' shares or American Depository Receipts (ADRs). 'A' shares remain tightly regulated for foreign investors and are still not included in MSCI indices. China's 'A' share market is dominated by private retail investors, who account for more than 80 per cent of the market and make it highly volatile.

Matthew Sutherland, head of Asia product management at Fidelity, adds: "The kind of 'A' shares we buy would typically not be the ones that domestic investors would be playing. It was the smaller Shenzhen-listed tech stocks that drove the spike and crash last year rather than the bigger blue-chip names we tend to invest in."

Funds that invest in 'A' shares are most likely to be hardest hit by the crash. Fidelity China Special Situations has over 21 per cent of its assets in 'A' shares, and Fidelity China Focus (LU0457959939) and Baring China Select (IE00B8BY9984), respectively, have 9.6 per cent and 6.8 per cent in these.

'B' shares (foreign currency listed Chinese stocks), 'H' shares and ADRs are not immune to the crashes affecting China's market, but are likely to feel less pain for a shorter time. On Monday, the Hang Seng Enterprise Index was down 3.6 per cent, around half the amount shed by China's domestic indices.

Charlie Awdry, manager of Henderson China Opportunities (GB00B5T7PM36), argues that this is an opportunity to buy stocks they like. Ross Teverson, manager of Jupiter China (GB00B3ZPHC12), added: "In the August crash last year a number of good companies got dragged down by the overall sell-off in China and emerging markets, but subsequently recovered."

However, there are still reasons to be nervous about China this year. Even if company fundamentals are good, if sentiment continues to be this negative, share prices will be hit across the board and funds are likely to suffer as the currency weakens.

Sanjiv Shah, chief investment officer at Sun Global Investments, said: "The background trend of slowing growth as manufacturing continues to perform poorly clearly continues to worry traders and undermines the Chinese government's expectations of a growth rate of 7.5 per cent. Its latest attempts to prop up the market reflect the seriousness of the situation and it would not be surprising if the regulator's ban on short-selling, which is due to expire on Friday, is maintained."

Funds and trusts posting biggest losses over one day

*Trusts with more than 10 per cent invested in China, funds with over 30 per cent invested in China

Source: FE Analytics.

Fund and trusts with 'A' share exposure

Source: Fund providers