FOREIGN investors have started rebuilding their China equity portfolios, tempted by low valuations after two years of market under-performance and signs economic growth may be stabilizing.
They have pumped nearly US$4 billion into Chinese equity funds in the past two months alone, trying to get in early on what they hope will be a sustained rally.
But sentiment looks to be running ahead of fundamentals. There are clear risk signals for the Chinese market -- including sluggish earnings, rising corporate debt and retail investors looking for other opportunities - even if the broader economy gathers strength.
"Valuations are attractive and fears of a major slowdown in China seem to be waning, while China still promises growth faster than the rest of the world," says Paul Gillis, professor at Peking University's Guanghua School of Management.
Gillis said despite that, most of the problems affecting Chinese stocks, including accounting fraud and the variable interest entity, have not gone away and still need to be solved.
Illustrating that growth does not translate into equity gains, the MSCI China stock index has fallen more than 40 percent since its launch in 1992. Over the same period, China's nominal GDP has increased by 15 times.
The shift in foreign investor attitudes is clear.
Bank of America Merrill Lynch's global survey of fund managers, covering 248 managers with US$695 billion of assets under management, found confidence in China's economy was at a three-year high.
Bullet train attendants receive trainings in China's Shenyang
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