Jan. 15 (Bloomberg) -- China’s best-performing stock funds are turning bearish on housing shares after a run-up in real estate that investor Mark Mobius says is far from over.

Shanghai Elegant Investment Co.’s Shi Bo and Chris Ruffle, China co-chairman of Martin Currie, say they may sell property- related shares as the government clamps down on lending to prevent the economy from overheating. They’re buying retailers, health-care companies and medical equipment makers.

“Property prices are already very high so there’s limited room for further growth,” Shi, who oversees the equivalent of $1.5 billion, including a fund that was ranked first among the 678 China-based funds tracked by Bloomberg, said in an interview. “We won’t see a return to the growth model of yesteryear. The next phase will be a transformative one, led by a shift from manufacturing to consumption.”

China’s central bank took its first steps on Jan. 12 to curb lending by increasing the proportion of deposits banks must set aside as reserves. Property prices in 70 major Chinese cities rose at the fastest pace in 18 months in December, the government said Jan. 14, and new bank loans reached a record $1.3 trillion in the first 11 months of 2009.

Mobius, who oversees $34 billion of developing-nation assets at Templeton Asset Management Ltd., said Jan. 7 he’s buying shares of developers because consumer demand will increase and government efforts won’t hurt economic growth.

“The Chinese will act rationally and they’re not going to kill the market,” Mobius, 73, said in an interview in Singapore. “There’s still a lot of savings in China. Prices are high but I don’t see a crash.”

Maintaining Position

Mobius said this week he’s maintaining his position after the central bank’s actions. The People’s Bank of China raised the reserve requirement by 50 basis points, or 0.5 percentage point, signaling its intention to increase borrowing costs earlier than economists’ predictions in a Bloomberg survey last week. The central bank last raised interest rates in December 2007.

While Mobius is a “very successful investor,” the bet on real estate “all depends on government policy,” said Ruffle, whose Edinburgh-based company manages $19 billion, including a China fund that beat 90 percent of rivals last year. “The government is keen to restrain the property boom.”

The 33-company Shanghai Composite Index’s property measure rose 103 percent last year, pushing up the average price-to- earnings ratio to 29 times reported earnings, compared with 14.2 at the beginning of 2009, according to data compiled by Bloomberg. The index has fallen 9.1 percent over the past month.

Second-Worst Performer

Property is now the second-worst performing industry in the Shanghai Composite this year and Premier Wen Jiabao said Dec. 27 the government will use taxes and interest rates to “stabilize” the market. Morgan Stanley’s China strategist Jerry Lou said Jan. 5 that a property tax may be introduced this year, predicting an end to the rally for real estate stocks.

Ruffle, 52, said he’s selling some developers, banks, airlines and Internet company NetEase Inc. Shi plans to avoid property stocks after home values increased.

“Inflation is the number one threat,” Ruffle said.

Ruffle and Shi are bullish on the prospects for consumer and health-care stocks even if interest rates rise, saying the companies will benefit most as the government increases domestic spending to diversify the economy away from exports.

China’s share of global consumption will jump more than fourfold to 23.1 percent in 2020, from 5.2 percent in 2009, and overtake the U.S. as the world’s largest consumer market, Credit Suisse said in a report this week.

Focus on Consumers

“Consumer names will continue to be a market focus,” said Lilian Co, who manages $300 million as chief investment officer at Hong Kong-based LBN Advisors Ltd. “We expect more government policies to boost domestic spending and possibly tax cuts.”

Co’s China+ Opportunity fund beat 94 percent of rivals in the first 11 months of 2009, according to Bloomberg data.

“Consumers in the richer coastal provinces are likely to spend on seeking a healthier lifestyle,” said Shi, whose funds gained 110 percent in the past year.

Ruffle favors some retailers because they will benefit from rising domestic consumption and are “entrepreneurial-type companies.” The government needs to keep expanding consumption to drive growth, the cabinet said Dec. 9, as it extended subsidies for purchases of automobiles and appliances in rural areas.

Hong Kong-based fund manager Clive Zhang said real-estate stocks carry “risk” while higher interest rates may have a “marginal” effect on retail spending because increases won’t be steep enough to deter purchases.

“I’m not as bullish as Mobius,” said Zhang, whose Vision Finance China Ocean Fund jumped 163 percent last year. “Relative to other sectors, property carries more risk.”

--Allen Wan, Zhang Shidong, Chua Kong Ho. Editors: Linus Chua, Alan Mirabella

To contact Bloomberg News staff for this story: Allen Wan in Shanghai at +86-21-6104-7013 or awan3@bloomberg.net; Chua Kong Ho in Shanghai at +86-21-6104-7011 or kchua6@bloomberg.net; Zhang Shidong in Shanghai at +86-21-6104-7014 or szhang5@bloomberg.net

Last Updated: January 15, 2010 03:51 EST