Investors Shift Back Into China on Optimism About Structural Changes

Investors are moving back into China to scoop up cheap shares and take part in billion-dollar initial public offerings while exiting previously red-hot markets across Southeast Asia.

Mounting signs of stability in the region's largest economy and a recently released reform package in Beijing are boosting optimism there as interest wanes in Southeast Asia's fast-growing economies, which in recent years were seen as being insulated from the global economic slowdown.

Emerging-market investors now favor China over any other Asian market, according to a December survey of fund managers by Bank of America Merrill Lynch. China also saw four months of foreign-currency inflows through November.

"Fundamentally, and over the long term, we think Southeast Asia is sound, but the place transformation is happening is in China," said Gary Greenberg, head of emerging markets at Hermès Fund Managers in London, which manages assets worth £26.1 billion. Mr. Greenberg says he is overweight for North Asian markets.

South Korea and Taiwan stand to benefit from a pickup in the global economy thanks to their heavy exports, while investors began to sour on Southeast Asian countries this spring, after the U.S. Federal Reserve indicated it would start withdrawing economic stimulus that had been credited with pushing up asset prices, especially in some emerging markets with rapidly growing consumer appetites.

Indonesia, which until May was touted as a buoyant growth market because of its rising middle class, a deep current-account deficit is proving problematic, while daily protests against the government in Bangkok are hurting Thailand. Even the Philippines, a market that investors remained positive toward through the summer, lost its sheen after the country was devastated by Typhoon Haiyan, one the deadliest storms the country has weathered.

Indonesia's JSX Composite Index is down 3.5% in the year to date, while Thailand's SET Index is down 4.7%. Indonesia's benchmark shares had risen 12% in 2012, while Thai shares soared 36%. China's shares have also drifted lower this year, continuing a trend of generally lower prices since 2009—the Shanghai Composite Index is down 7.9% in the year to date and 39% since reaching a high-water mark in mid-2009—but investors are betting that the structural changes it is making will help it outperform smaller Asian-Pacific markets.

"If China starts to run, who is going to care about those [Southeast Asian] markets?" said David Gaud, senior fund manager at Edmond de Rothschild Asset Management, which manages around $60 billion of assets. Mr. Gaud is overweight China and underweight Indonesia and Thailand.

China's reform blueprint, released last month, has cemented the view that the new government in Beijing is committed to undertaking the kind of economic reforms necessary to ensure that the country can sustain economic growth.

The government pledged to open the financial sector, allow the prices of natural resources to reflect market demand and relax restrictions on sectors that are currently closed to investors. The Shanghai Composite rose by nearly 8% in the two weeks after the blueprint was released, but it has since erased those gains, as investors wait to see whether Beijing can successfully implement the reforms.

"The way I look at this new government, even if they cannot deliver 100% of what they want to achieve, they probably can achieve 70% of their goal," said Hiroshi Yoh, chief executive officer and portfolio manager of Janus Capital Singapore Pte. Ltd., part of Janus Capital Group, which managed $166.7 billion as of Sept. 30. "That is going to be very substantial for China."

The current enthusiasm for China isn't universal, as the rapid growth of the country's shadow-banking sector—a loosely regulated area of lending—is prompting concern that companies will pile up unsustainable debt by tapping alternative financing in the face of tighter monetary policy. Underscoring China's credit challenge, Chinese money-market rates have risen sharply recently, echoing an unprecedented cash crunch in the summer, which sparked a heavy selloff in the local stock market.

As part of China's efforts to stem the decline of stock prices, it effectively closed the pipeline for domestic IPOs last November. The regulator said shortly after the economic-reform blueprint came out that it would restart the approval process early next year with a more market-oriented listing process. The move coincides with two large IPOs of Chinese companies in Hong Kong, the completion of which reflect optimism for Chinese companies.

China Everbright Bank Co. 601818.SH 0.00% raised $3 billion, making it the biggest Hong Kong IPO of the year. Though the debut was lackluster, it was a significant move forward for the bank, which had tried and failed to launch an IPO twice over the past couple of years. China Everbright's launch came on the heels of the debut of "bad bank" Cinda Asset Management, which raised $2.5 billion in an overwhelmingly successful deal, with shares rising 26% on its first day of trading last week.

In contrast, a spate of Southeast Asian deals have been canceled, postponed or cut, as markets, which began the year on a high note, fell. IPOs slated for this year include D-NET in Indonesia and the 7-Eleven store chain owner in Malaysia, both of which were postponed in view of weak markets.

In October, Indonesia's Salim family delayed plans to raise as much as $300 million through a share sale of PT Dyviacom Intrabumi DNET.JK -1.23% Tbk, a diversified company with interests ranging from fast food to convenience stores, because investor valuations fell short of the family's expectations.

Malaysia's Sinarmas Land Ltd. A26.SG 0.00% in July planned to raise as much as $270 million in an IPO of its unit PT Puradelta Lestari, an industrial park developer, but it soon afterward postponed the offering, citing market conditions, according to a person familiar with the matter. In June, an Indonesian private-equity firm Saratoga Capital cut the size of its IPO by around a third due to fund outflows from emerging markets.

—Prudence Ho and Cynthia Koons contributed to this article.