DOMESTIC fund managers suggested raising bond allocations to the highest in five months, while cutting back on equities to a 10-month low as a slowing economy stokes fears of credit defaults, according to a recent poll.

    Average recommended allocations to stocks over the next three months dipped to 81.1 percent in February, its lowest since April, from 83.8 percent in January.

    Bonds saw a rise to 6.2 percent, the highest since September, from 3.3 percent, while cash was cut from 13 to 12.7 percent, according to a monthly poll of nine fund managers conducted last week.

    “I am concerned about worsening China macro data. Small cap stocks are also overvalued, if the bubble bursts, it will be a big drag on the broader A-share market,” said a Shanghai-based fund manager.

    The ChiNext Composite Index of mainly hi-tech startups listed in Shenzhen has outperformed the broader market, gaining 10 percent this year after surging 75 percent in 2013.

    This compares with the more than 3 percent slide on the Shanghai Composite Index this year after a 6.7 percent decline in 2013.

    China’s official manufacturing purchasing managers’ index (PMI) slowed to an eight-month low of 50.2 in February from January’s 50.5, the National Bureau of Statistics said Saturday. A similar private survey last week also showed factory activity contracted for the second month in a row, adding to fears that the economy may be losing momentum more rapidly than expected.

    Banks’ bad loans are rising and policymakers continue to wrestle with high local government debt levels while trying to curb riskier lending practices.

    Earlier last month, domestic media reported that six domestic trust firms have lent more than 5 billion yuan (US$824.6 million) to a coal company which became delinquent, raising the prospect of further defaults in China’s so-called shadow banking system. (SD-Agencies)