Unicom next

But the fund managers have decided to be cautious and to not break out the expensive Moutai just yet. This is still early days for the A share Red Dragon Fund, set up by the CHINA ECONOMIC REVIEW to take advantage of what we believe could be a turning point in the fortunes of the poor, battered Chinese equity markets.

As a first purchase last month, we bought Baosteel, and saw a satisfying rise of about 3% in its value over the month. It's always nice when you win on the first spin of the roulette wheel. But it was not just luck – there are fundamental reasons why Baosteel remains a good buy. The Chinese government is working to restructure the domestic steel industry, to reduce the number of players, thereby increasing market share for the efficient operators, who of course include Baosteel. It was also the view of the market that the domestic steel industry benefited from the RMB revaluation by cutting the costs of imported raw materials.

So this month, we bought a few more Baosteel, and also some China Unicom, through our account with China Securities. The table below gives details of the Fund's current holdings.

There are several reasons for buying China Unicom, and one is that the telecommunications sector is hot but the obvious play in that sector – China Mobile – has no A shares listed and traded within China, which means us poor laobaixing stock traders are excluded from the opportunity to invest in the best China-listed telecoms asset. How come the foreigners get all the plum opportunities? Why are we A share traders being discriminated against? I am going to write an indignant letter to my National People's Congressman. Maybe.

China Mobile announced a 28% rise in profit for the first half, and the best China Unicom has been able to do so far is announce that it intends to make its CDMA business profitable before the end of this year.

There have also been reports that China Unicom will be broken up into two parts between China Mobile and Netcom. Whatever the truth of that may be, at least Unicom is listed and traded on the Shanghai Stock Exchange, and is therefore available for the Red Dragon Fund to buy. So we have bought 500 shares.

China Unicom gives us a warm fuzzy feeling, not only because of basketball superstar Yao Ming who is shown using Unicom mobile phones in millions of ads plastered across China, but also because we use the CDMA wireless data network every day to connect our laptop to the motherlode of the Internet, like now in the back of a taxi rolling through the increasingly clogged streets of Shanghai.

As to the overall sense of where this market is going, it remains possible that we have seen and passed the market's low point. But the day traders are still showing a reluctance to leap back in, and prices at the time of writing appear to be capped by strong selling pressure.

It remains our view that to solve this problem, the China Securities Regulatory Commission has to open up the A share markets to great amounts of foreign investment, through a widened and flexible QFII channel. They also need to do more painful work on cleaning up the market – allowing a few crap companies to de-list, and making more strenuous efforts to enforce corporate governance standards with listed companies.

If they do that, Chinese companies – such as China Mobile – will be less incentivized to list on markets outside of China, the day traders will feel more comfortable about getting back in the water, and foreign capital can start to play a greater role in creating a solid base of institutional shareholding to underpin the volatile day-trading.

The sooner they take these steps, the sooner the Red Dragon Fund will leap in value and we will kick ourselves that we launched the fund with such a small sum of money.

This column is provided for reference purposes only and CHINA ECONOMIC REVIEW takes no responsibility for any investment decisions made on the basis of information or analysis in this column.