Bargain hunters circle as stocks sink

$98m of foreign capital added in past two weeks, highest inflow since February

Foreign investors are increasing their positions in Chinese equities, after recent market declines dragged valuations to record lows.

Offshore yuan equity funds saw a net inflow of $138 million in the four weeks ending Aug 22, indicating increased overseas interest in Chinese equities, according to EPFR Global, which tracks funds under management worth $17 trillion.

Around $98 million were added over the last two weeks, indicating the highest inflow in foreign investment in Chinese stocks since February.

The rise in offshore interest comes as recent plunges in value have dropped the Shanghai stock market close to the psychologically important 2000 points, which analysts believe will open the door to bottom feeding, when investors buy stocks at the level they think are near the bottom of their range.

The major Shanghai Composite Index was down 0.03 percent, or 0.65 points, on Thursday to 2052.58 points. It has sunk 6.93 percent so far this year and 2.98 percent this month.

The market saw a 1.74 percent drop on Monday after the National Bureau of Statistics said that profit at major industrial enterprises dropped 5.4 percent in July from a year earlier.

The Shanghai A-share market's price-to-earnings ratio, a measure of valuation, was 11.05 on Wednesday, a record low, according to the Shanghai Stock Exchange.

The finance and insurance sector has the lowest price-earning ratio of 7.53.

"The A-share market's valuation has become really attractive," said Wang Jianhui, chief economist with Southwest Securities Co Ltd.

Deng Tishun, a manager at Invesco Great Wall, a Chinese mutual fund, added that the low valuation is a result of pessimistic market sentiment, and not an accurate reflection of economic fundamentals, but still believes it's a good time to start bottom feeding.

China's economic growth slowed to a three-year low of 7.6 percent in the second quarter.

But some economists believe the worst has passed and growth will rebound in the second half.

TrimTabs, a financial data provider in the United States, was quoted by Shanghai Securities News as saying that $160 million had flowed into exchange traded funds, or ETFs, of Chinese equities managed in the US, in the first three weeks of the month - the first net inflow of Chinese ETFs since January this year.

As early as June, when equities were still considered buoyant, Qatar's sovereign wealth fund applied for permission to invest up to $5 billion in China under the qualified foreign institutional investor program, which allows overseas financial investments in China, whose currency is not fully convertible under the capital account.

The position of foreign fund managers has always been one of the most important signs of movement in the A-share market.

The annualized returns of QFII have averaged 11.9 percent, after being introduced a decade ago, far outstripping that of Chinese fund managers.

In response to growing requests, the country has increased the QFII quota by $6.9 billion since December last year, according to Bloomberg. The total QFII quota now stands at $80 billion.