China's social security fund has suffered heavy losses two months after it entered the stock market.

Latest corporate results for the first half year have presented a gloomy picture of profitability, and prices of most stocks the fund bought have tumbled.

The investment by the fund has a market capitalization of more than 100 million yuan (US$12 million). The volume is limited because it was invested in bourses only as an initial experiment.

But it is already enough to anger the critics, who have always challenged the feasibility of pouring the welfare fund into the high-risk stock market.

The national social security foundation, through six entrusted fund managers, has bought in 12 stocks, mostly from the secondary market.

They represent sectors ranging from iron and steel, biochemical, auto parts, mobile, real estate to public transportation.

The volume of stocks the fund holds in each company varies from 30,000 to more than 5 million shares.

The actual investment volume by the fund should be bigger as more investments are expected to be revealed in the coming interim reports of more listed companies.

Shanghai-listed Beijing Bus - a public transportation company in the capital - has been a favourite for social security fund managers. The fund bought more than 1.2 million shares of the company, making it one of the top ten biggest holders.

Yet the company reported a 308.62 per cent decline year-on-year in net profits in the first half year, and net losses reached 129.8 million yuan (US$15.7 million).

China Sports, another favourite of the fund, also reported net losses of 16.8 million yuan (US$2.03 million) in the first half year.

Both firms attributed their interim losses to the SARS impact, which has greatly affected the business for public transportation and sports events since April.

Why the fund managers have chosen the loss-makers is still not clear, as the investment operation has been kept secret according to investment deals.

Some analysts said the fund seemed to prefer stocks that are less popular with investors to dig up the potential value.

An official with the China Assets Management Co, which oversees around 4-5 billion yuan (US$418-602 million) of the national social security fund and has bought in Beijing Bus for the foundation council, said the pick was a prudent decision based on the company's history, present status and future prospects.

Great importance has been put on investment for the welfare fund and special investment management and risk monitoring systems have been set up, he said.

Given the development potential of the transportation and sports industry in the capital before the 2008 Olympics, people still have reason to take a rosy outlook in the medium and long term of the two firms, an analyst with Guoxin Securities said.

But he said the timing, stock-pick and diversity are still very important to minimize risks.

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