Feb. 16 (Bloomberg) -- Shenzhen Starrock Investment Consulting Co., whose first three funds are ranked among China’s top 10 over the past year, said it’s returning to stock purchases as valuations are “reasonable” and inflation is easing.

The Shenzhen-based company run by former ICBC Credit Suisse Fund Management Co. fund manager Jiang Hui has begun to switch back to stocks after reducing holdings since the fourth quarter of 2007, spokesman Liu Chang said in a telephone interview today. Jiang, who oversees 600 million yuan ($88 million), declined to be interviewed.

“Investment opportunities have increased compared to a year ago,” Liu said. “We started increasing our equity allocation in the fourth quarter as stock valuations became more reasonable and a slowdown in inflation showed the market may have entered a trough.”

Shares in the world’s third-largest stock market by capitalization have rallied since Nov. 9, when China pledged a 4 trillion yuan ($585 billion) stimulus package. The Shanghai Composite Index has gained 31 percent this year, the most among 90 gauges tracked worldwide by Bloomberg, as the government unveiled plans to aid industries from shipbuilding to textiles.

Three of Shenzhen Starrock Investment Consulting’s funds are ranked in the top 10 of 451 China-domiciled funds tracked by Bloomberg over the past 12 months. The three funds averaged a 9 percent gain in that period, compared to a 48 percent loss for the Shanghai Composite, according to Bloomberg data.

Morgan Stanley said in a Feb. 12 note that China stocks will probably outperform emerging markets worldwide and recommended investors increase their “overweight” positions. The Shanghai Composite gained 3 percent today.

Stocks, Bonds

Shenzhen Starrock Investment Consulting is returning to equities after having boosted investments in convertible bonds since the fourth quarter of 2007, Liu said. Record valuations, tightening monetary policy and accelerating inflation had pointed to “systemic risks” in China at the time, he said.

Liu declined to say what proportion equities make up the fund’s holdings currently or to disclose the funds’ top holdings. The company was set up in 2007 by Jiang, whose career includes stints at ICBC Credit Suisse, ABN Amro Xiangcai Fund Management Co. and China Asset Management Co.

China’s producer prices tumbled the most in almost seven years and inflation cooled to the weakest pace since 2006 in January as growth slowed, according to data from the statistics bureau last week. Slowing inflation leaves more room for interest-rate cuts to increase domestic demand.

The Shanghai Composite now trades at 18.8 times earnings, compared to 48.7 times on Oct. 16, 2007, when the measure reached a record 6,092.06 points.

Volumes Jump

Stock trading volume on the Shanghai and Shenzhen exchanges rose to 32 billion on Feb. 11, the highest since Bloomberg began compiling the data on Jan. 3, 2006. An average of 18.2 billion shares have changed hands daily this year, up from 15 billion in 2007, when the Shanghai Composite doubled. Chinese investors opened new stock trading accounts at the fastest pace in two months in the week after the Lunar New Year holiday.

Trading volumes plunged to an average 9.8 billion shares last year as the index tumbled 65 percent amid a global recession.

The world’s third-biggest economy may expand 6.6 percent in the second quarter after slowing to 6.3 percent in the three months to March 31, the weakest pace since 1999, according to the median estimate of 14 economists surveyed by Bloomberg News.

China’s stock market rally could falter if economic growth continues to deteriorate and companies report further declines in profitability, Liu said. Only three of the 300 stocks on the CSI 300 Index, which tracks shares on the Shanghai and Shenzhen exchanges, are down this year.

“The upcoming reporting season, where companies release their annual results, will confirm for investors the extent of the impact from last year’s economic slowdown,” he added.

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

Last Updated: February 16, 2009 04:58 EST