China fears spark flight to safety

HONG KONG (Reuters) -- Fears about liquidity in China this week drove outflows from global emerging market stocks to the highest of the year, with investors shifting to bonds instead, fund tracker EPFR Global said in a note on Friday.

Global emerging markets equity funds saw $946 million flow out the door in the third week of August, with the lion's share of $810 million redeemed from Asia ex-Japan stock funds. China equity funds had their worst week since early in the first quarter of 2008.

Meanwhile, global bond funds tracked by EPFR, coming off a record month of inflows in July, took in a net $954 million in fresh money this week.

"China's resilient growth has been a key driver of flows into emerging markets equity funds in recent months," the firm said..

"During the third week of August, however, doubts about the quality of the loans doled out at breakneck speed by Chinese banks during the first half of 2009 prompted investors to book profits and take some of their recent gains off the table."

A 5.8% plunge on the Shanghai composite index on Monday rattled global markets, though the index recouped some of those losses later in the week. The index is on track for a third consecutive week of declines.

Commodity-sector stock funds continued to be hot among investors, raking in new money for a fifth straight week and bringing year-to-date net inflows to more than $7 billion. The financial, utilities and telecom sectors also had net inflows.

Investors were still finding value in U.S. bonds, with net inflows to the fund group at $2.49 billion, bringing year-to-date inflows to near $43 billion.