TAIPEI, Taiwan -- Foreign investors are wading back into Chinese stocks despite worries that the market's recovery may not last long.
About a dozen foreign institutions raised their investment quotas for China last month. Most were banks and asset managers, largely from other parts of Asia, and analysts believe the quotas will be used to open funds or add to existing ones. Total approved foreign currency investment rose a quarter percent last month to $78.97 billion.
"I think foreign funds are still cautious, although they may be interested from a tactical perspective," said Alicia Garcia Herrero, chief Asia-Pacific economist with the French investment bank Natixis. "Short term the situation is clear. The market has a bottom so it seems like a safe play, but a few months down the road the situation can rapidly change."
China bars individual foreign investors from trading "A" shares, but people from offshore can buy into the funds of institutions with the quotas.
Among the mutual funds with assets in China are the Morgan Stanley China A Share Fund (CAF - Get Report) and the ProFunds UltraChina Inv (UGPIX - Get Report) . Exchange-traded funds include the Matthews China Dividend Investor (MCDFX - Get Report) fund run by Matthews Asia, and Van Eck Global's Market Vectors ChinaAMC A-Share ETF (PEK - Get Report) .
All four funds have gained value since late August. Foreign funds overall were net sellers of Chinese shares from May through September, though outflows tapered toward the end.
After plunging 40% over the summer, China's benchmark Shanghai Composite Index has rebounded almost 15% since Aug. 26. Stocks have risen 8.3% so far this month after an 11% gain in October.
But stock valuations -- though cheap by U.S. standards -- are still considered too high. And there's the issue of China's declining economic growth.
Net income for China's top companies fell 2.1% last month over October 2014 after a tiny increase in September. Profits from China's state firms -- the worst performers -- declined more than 1% over the first 10 months of the year compared to the same period of 2014.
That trend might scare investors away from the giant state-owned companies behind China's raw materials, manufacturing and construction. Newer firms, such as Chinese Internet content providers Tencent (TCEHY) and Sohu.com (SOHU - Get Report) , would be more tempting as their share prices track the benchmark index.
Tech shares, however, have a reputation for high prices.
"Investors should, I think, increase their risk appetite, but because the market is so big, do you take a big or small risk?" asks Liang Kuo-yuan, chairman of the Yuanta-Polaris Research Institute in Taipei. "The newly created industries might attract people, but the ones that are already mature, the risk is greater."Chinese officials who hope to stoke stocks as an economic engine have encouraged local institutions to buy, moved to liberalize the yuan currency and most recently resumed initial public offerings. Authorities froze IPOs in July to free up capital for the ailing broad market.
Updates to IPO rules will make it easier to buy freshly listed firms, said Charles Salvador, investment solutions director with Z-Ben Advisors in Shanghai.
"Investors responding positively to IPOs resuming is a sign of strength for the markets," he said.