As at 31st March 2010, the 788 Leveraged China Fund had a leverage factor of 2.8 x, and the exposure was primarily the the  H-shares index future.  Some exposure to Taiwan was implemented as well.

We reamin very bullish on The Chinese idexes and would expect to multiply the NAV of the 788 China Fund by 2 to three times in 2010.

 15th April 2010

CHINA'S ECONOMY GROWS AT 11.9 %

As we rightly predicted in December 2009. the Chinese economy is powerin ahead very strongly and reached our 12 % target in the first quarter of 2010.

•  Several Key structural forces are behind China's long term economic success and tremedous increase in living standards : a dramatic productivity leap brought by structural reforms, a highly educated pool of people, a very flexible labor market, a huge propenstiy to save and government policies that direct resources towards strategic infrastructure development with a long term vision.

• Cyclical blips in a 30 years structural growth path are inevitable. 2008 was an external shock that hit China mainly through its asset and financial markets but not really the real economy, apart form speeding the process of creative destruction of the old labor intensive, low added value, excport oriented industries of the 1990s.  Blips and the corresponding market correciosn are an opportunity to increase positions as valuations are t a large discount to what growth and earnings deserve.

• Prevailing concerns about Chinese "bubbles" or China about to collapse are misfounded and are not in line with the facts. The investment community, particularly in the US has long been circumspect about the country and its 30 year growth, the sustainability of its development model or the fragility of its political system and corporate governance. 

In the past three decades, China endured numerous shocks such as the inflationary boom-bust cycles of the 1980's and the 1990's, the political turbulences of the Tienanmen Square incidents, the burst of the property bubble in the early 1990s, the Asian financial crisis of 1998, the burst of the technology bubble in 2000 and mre recently the burst of the great debt bubble of the USA in 2008. Everytime, doomsayers predicted the fall of China and massive political upheavals, yet the economythe social fabric and the political system have proven extremely resilient.

The authorities have fixed a banking system that was once ridden with 20 % bad loans, to ensure the smooth transition between a centrally planned economy and a market economy. today, Chia's banking system is one of the safest and most liquid in the world.

China has experienced enormous wealth creation across the entire spectrum of households. This is visible through numerous indicators, amongst which the sharp rise in rich entrpreneurs, the surging number of tourists and the explovie growth in car sales, China being now the largest single market in the world.

It is also highly correlated to a successfull policy of mass migration from the country to the cities. in 1978, 172 million chinese ( or 18 % of the population )  lived in cities. Today, 600 million people ( or 43 % of the population)  lives in cities and China has 214 cities with more than 1 million population, 22 mega cities of more than 5 million, and 71 cities with between 2 and 5 million.

Infrastructure building has bee key to this phenomenon and the family structure makes the transition smoother and even more productive.

A typical rural family has one child. when the child gets married, 4 persons, parents + children, lived and farned 4 acres of land. When the two children migrate to the cities, the parents only have two mouth to feed instead of four and the children experience a substantial increase in their earning power and disposable income. As agricultural ouptut does NOT diminish, agrcultural productivity doubles.

Since October 2008, the major reform of agriculture added another fuel to the migration and increase in agricultural productivity. the remaining couple can lease its four acres of land to a neighbour or a cooperative, and move to the city where they get jobs, higher income, the rent of their land, while the farner who leased it increases his productivity by having more land to farm.

Investors worried about what ssems to be an overbuilding of real estate in the cities and predicting an imminent collapse should take into consideration that in addition to the natural growth rate of the urban populations themselves, between 30 to 40 million people move from the countryside to the cities every year, which explained why real estate continues to be growing at high rates.

The key to the continuation of the phenomenon, anothe 300 to 400 million people in the next decade is job creation in the cities. In that respect, China needs above 8 % real growth and the urban infrastructure must be in place to accomodate such migration.  This is why the priorities of the Chinese Government are about growth and infrastructure spending.

In the coming years, the best growth will be in the western, inland part of China. Agriculture is going through its own revolution.

STAY INVESTED and INCREASE YOUR HOLDINGS