A PERIOD of weakness in Chinese stocks and the economy is luring domestic institutional investors back into the equity market — the activity is small, but follows classic economics of buying low ahead of a possible turn as the government ramps up stimulus to shore up growth.

    Traders say brokerages, mutual funds and major institutional investors are quietly increasing their exposure to the stock market, which has seen a shattering US$1.4 trillion wiped out of the Shanghai and Shenzhen exchanges since the October 2007 peak.

    The reports follow signs that offshore funds also began quietly increasing their China exposure after the government signalled it would begin allowing bond defaults, which some hoped would push money into stocks.

    The purchases do not necessarily mean the market has bottomed out, particularly given the recent sharp slowdown in the Chinese economy from its red-hot double-digit growth rates.

    All the same, it does suggest a nascent recovery process may be underway, with stock pickers betting on fat profits several years out if the government follows through with its commitment to stop meddling in the stock market and make firms more accountable to shareholders.

    In addition, there is the prospect of making quick profits over the near term if the central bank loosens its tight grip on the money supply to shore up the economy, which slowed to 18-month lows in the first quarter.

    Evidence is mounting that authorities are ramping up their efforts to energize the economy, with fiscal spending shooting up 24 percent year on year in May.

    Index heavyweights like property developers and banks have been on the receiving end of a lot of bad news recently. Paradoxically, that is seen as a good time to buy low by some, especially to catch a rebound spurred by possible monetary loosening.

    “Evidence is clear that long-term investors have begun building fresh positions. Over time, the market may not be as weak as we have seen over the past several years,” said Chen Huiqin, senior analyst at Huatai Securities in Nanjing.

    “However, a bull run isn’t on the horizon yet.”

    The average Chinese investor remains on the sidelines, in no small part because they have seen more than US$1.4 trillion in value, equivalent to 16 percent of China’s gross domestic product in 2013, erased from the Shanghai and Shenzhen exchanges since the benchmark Shanghai Composite Index’s historical peak of 6,124 points in October 2007.

    That has brought the average price/earnings ratio of around 2,500 Chinese listed firms to less than 10 times historic earnings, from more than 70 times in 2007, exchange data show.

    “If you’re a long-term investor and plan to keep shares on hand for two or three years, it makes sense for you to build positions gradually now because of reasonable valuations,” a manager at a Chinese mutual fund said.

    Citing record low valuations, Qiao Yongyuan, analyst at Guotai Junan Securities in Shanghai, forecast that the market could rise by as much as 20 percent by the end of 2014.

    However, short-term surges based on monetary easing expectations have occurred in the past, without gaining long-term traction.

    That leaves reform as the major remaining inducement. The previous market bull run from 2005 to 2007, during which the index rose six-fold, was propelled by government reforms.

    But so far this time the suggestion of reforms in the pipeline has not inspired China’s retail investors to jump back in.

    Many of the reforms, while positive, have been incremental technical tweaks. (SD-Agencies)