Fidelity Investments, which oversees the largest China funds outside of the mainland, is joining Goldman Sachs Group Inc. in saying that Chinese stocks are a buy following the worst selloff in two decades.

“As far as the fundamentals are concerned, we are actually quite confident,” Robert Bao, a Hong Kong-based money manager at Fidelity, which oversees more than $2 trillion globally, said in a telephone interview. “We are fully invested.”

Fidelity is echoing the bullish call from Goldman Sachs, saying the four-week rout that wiped out almost $4 trillion in market valuation has limited impact on earnings and economic growth. Government efforts to stabilize the market will keep the rout from spilling over to the broader financial system, Bao said.

The Shanghai Composite Index rallied 4.5 percent at the close on Friday, adding to Thursday’s 5.8 percent surge, after regulators this week banned major stockholders from selling stakes in listed companies and allowed banks to roll over loans backed by shares. The benchmark is still down 25 percent since June 12 as leveraged investors unwound bets. More than 1,300 companies remained halted on mainland exchanges on Friday, locking sellers out of 47 percent of the market.

David Fuller's view

There have been some big short positions in China’s stock markets, including from some US hedge funds.  Needless to say, Chinese officials love to squeeze shorts, particularly when they are held by foreigners in their markets.  

Rule # 1 in China’s managed stock markets: Do not fight Chinese officials when they are actively in the market.

Every stock market investor in the world has been very worried about dark clouds hanging over China and a possible ‘Grexit’ during the last several weeks, including earlier this week.  Suddenly, the sun is shining once again and stock markets are pushing upwards like spring flowers.  This should carry on for a while because the fear has lifted and markets are rallying from short-term oversold positions.  When they next become overbought, we should remember that we are in the more challenging months of the year, on average, which run from May through October.

(See Thursday’s comments on China, including Eoin’s reviewed list of investment trusts for China)