* China sees fund inflows, reversing last year’s outflows
* Shanghai Composite Index up 41 percent YTD
* Goldman Sachs raises China 2010 GDP forecast to 10.9 pct For more stories on Asia fund inflows [ID:nTP126890]
By Samuel Shen and Parvathy Ullatil
SHANGHAI/HONG KONG, May 4 (Reuters) - A bumper stimulus package and encouraging data have renewed confidence in China’s growth story, drawing a fresh surge of foreign money into its equity funds, but that flow could slow if Shanghai’s chart-topping stock rally loses steam.
The Shanghai Composite Index .SSEC has piled on 41 percent so far this year, partially recouping 2008's 65 percent plunge, the biggest drop in its 18-year history as the global economic slump burst the market's speculative bubble.
This time around foreign funds are buying into China’s $600 billion, two-year stimulus package and its determination to sustain strong growth by stoking domestic appetite for its goods and services even as export demand stays depressed.
Some encouraging recent data have altered foreign investors’ views, from thinking China would be the last to succumb to the global slowdown, to betting on a speedy recovery in the world’s third-largest economy.
“We have seen a dramatic change in sentiment in just two months. Eighty percent of the international investors we talk to either plan to overweight China or have already done so,” said Yifan Hu, chief economist with Citic Securities International.
Hu cited anecdotal evidence of a $20 billion emerging market fund that quadrupled its allocation to China to 10 percent.
Asian equity funds saw $1.6 billion in inflows in the 16 weeks to April 22, a big leap from the $8.1 billion in outflows in the same period last year, with China funds claiming a major chunk of the change.
Inflows into China funds were $1.2 billion in the four weeks to April 22. From the beginning of the year to April 22, flows totalled $754.5 million, compared with $812.5 million in outflows in the same period last year, Citigroup data showed.
Inflows into Hong Kong funds were $82 million in the four weeks to April 22. China’s two main stock markets are closed to most foreign investors, but outside listings for Chinese and China-linked firms -- most notably in Hong Kong -- often form the foundation for many China funds sold to overseas investors.
Investors have little choice but to buy into China’s recovery story this year, said James Liu, deputy CIO of APS Asset Management, as other major equity markets continue to ride roller coaster gains and dips.
“However, there’re also some concerns, especially after the Chinese stock market has had a good rally year to date while, in the meantime, external demand is still pretty weak, which will continue to impact the export sector,” Liu said.
China’s economic growth slowed to 6.1 percent in the first quarter, its weakest pace on record, but investors noted an improvement in data for March which offered signs that the worst may be over.
Economists have pointed to a 4 trillion yuan ($586 billion) stimulus package China announced last November as the main trigger for a quick turnaround in its economy. Drawn by the consumption focused plan, investors have taken a shine to sectors such as banking, property, consumer products and infrastructure.
Investors have also bet heavily on infrastructure companies like China Railway Construction (1186.HK) and cement maker China National Building Materials (3323.HK), and property developers like China Overseas Land (0688.HK).
Meanwhile, money supply surged as government-prodded new lending scaled a record 4.58 trillion yuan in the first quarter, close to its full-year target of 5 trillion yuan.
Last week, Goldman Sachs said the market was still too conservative, predicting 10.9 percent growth in China’s economy in 2010 on the stimulus measures, providing ample justification to invest in China-related stocks. (Additional reporting by Wei Gu; Editing by Ian Geoghegan)