CHINA is to establish a US$110 million fund aimed at investing in unlisted mainland industrial enterprises, reflecting a greater involvement at a senior level in raising capital for mainland industries. Authorised by the the State Council and the Ministry of Aeronautical and Aerospace Industries, the China Aeronautical Technology Fund, one of the largest China equity funds so far, will seek capital through an international placement this month. In addition to taking 10 per cent equity, the ministry will take an active management role, nominating two directors to the board of the fund and three to its management company. China Aerospace Industrial Corp, an investment arm of the Ministry of Aeronautical and Aerospace Industries, recently acquired Conic Investment as a listed vehicle in Hongkong. The fund will have SBCI Finance Asia as placing agent and financial adviser and Hongkong-based Tien Lee International as manager. The fund, incorporated in the Cook Islands, will be listed on the Dublin stock exchange. An SBCI spokesman said the fund was established initially to invest in 19 joint ventures supervised by the ministry. Capital gains will be realised through public listings and sales of stakes to corporate investors or direct investment funds after the enterprises have matured, according to the SBCI spokesman. The first listing is expected by 1995. The fund's initial portfolio, with an aggregate asset value of $335 million, involves investments in transport, avionics, aircraft, equipment and precision machinery. The fund's interest in these enterprises ranges from 25 per cent to 35 per cent and has an average price earnings multiple of 6.8, according to the 1993 prospectus. Jicheng Co, which produces motorcycles and motorcycle engines in Nanjing, will be the fund's core investment, worth about $20 million for a 25 per cent stake. The company is among the 500 largest industrial enterprises in China and is ranked as being the 35th most profitable transport equipment manufacturer. Unlike other China funds, about $94 million has been pre-allocated for the 19 target investments. Despite the fact that more than 10 China funds have been established in Hongkong and offshore so far, analysts in the fund industry estimate that only about 20 per cent of the total $1 billion raised has been invested. With investors seeing the benefit of a predetermined portfolio, more China funds are expected to be similarly structured, analysts say, but as stated in the prospectus, the fund also has a heavy currency exposure. With its assets solely allocated to direct investment in Chinese enterprises and thus with substantially all income in yuan, the declining value of the yuan is certain to have an adverse effect on the fund's profitability. In addition, changes in exchange rates will affect the US dollar value of assets in the fund's portfolio and the unrealised appreciation or depreciation of investments. The joint ventures may also incur costs in connection with conversions between yuan and US dollars. Under the articles of association, the fund is restricted to investing less than 20 per cent of its net asset value in any single project. It will have to realise any investment which has a value of 50 per cent or more of the net proceeds of the international placement or its net asset value. The Ministry of Aeronautics and Aerospace Industries is undergoing a structural change as part of the State Council's restructuring programme announced at the Eighth National People's Congress in March. The ministry will be divided into two divisions, responsible for commercial aviation and military and aerospace activities in China. The plan, expected to be implemented next month, will provide more scope for the enterprises which the ministry supervises to develop into profit-oriented and economically independent businesses.