Corrected - Insight: U.S investors not bailing on China stocks yet

(In July 9 item, corrects definition of A shares in paragraph 16; corrects paragraph 20 to delete erroneous reference to insurance company stocks)

By David Randall and Timothy Mclaughlin

NEW YORK (Reuters) - Some U.S. investors say China's efforts to prop up its stock market had the opposite effect, though the sell-off now offers buying opportunities at what they say are panic-driven prices.

Following a three-week market slide, stocks rose on Thursday after China's securities regulator banned shareholders with large stakes in listed firms from selling.

The move was Beijing's most drastic yet to stem a sell-off that saw the Shanghai Composite Index drop by almost a third since mid-June, wiping out about $3 trillion in market value.

Before Thursday's measure, China had cut interest rates, suspended initial public offerings and enlisted brokerages to buy stocks backed by cash from the central bank among other efforts to end the downturn.

The moves instead helped spread the rout to Hong Kong's Hang Seng index, whose listings of so-called H-share companies are largely owned by foreign investors and trade at lower valuations, fund managers said.

"You've had some misguided efforts to cushion the sell-off and that's ultimately led to the unintended consequence of making the situation worse," said Charles Wilson, co-portfolio manager of the $2 billion Thornburg Developing World fund who has been adding to his positions in Chinese consumer, internet and utility stocks over the last few days of the sell-off.

The Hang Seng fell 5.8 percent on Wednesday, its biggest decline this year, but closed up 3.7 percent on Thursday. The index is still up nearly 6 percent for the year to date, while the Shanghai index is up 16.7 percent.

Reuters contacted several prominent mutual fund managers, including the $8.7 billion T Rowe Price Emerging Markets Stock fund, the $1 billion Columbia Global Equity Value fund, and the $76 million Morgan Stanley Global Opportunity fund, who all declined to comment.

The sell-off was the widest in China, the world's second biggest economy, since the 2008 global financial crisis, despite the government's best efforts to stall it.

"The Chinese government is fighting a very, very tough fight to stabilize the market," said Christopher Moltke-Leth, head of institutional client trading at Saxo Capital Markets in Hong Kong. "But it is concerning that the government doesn't allow market forces to work, and that's something China must change over time".

OUTLOOK DEPENDS ON BEIJING

While U.S. investors say they remain largely bullish that China consumer spending will expand and the fallout from the stock market rout will be limited to the relatively small upper class of speculators that own A-shares, every portfolio manager interviewed by Reuters noted that additional policy changes by Beijing could alter their outlook.

At the same time, fund managers like Thornburg's Wilson say the volatility and sell-off is making the Chinese market more attractive for long-term investors, even if the market has not yet hit bottom.

Emily Alejos, portfolio manager of the $20.8 million Nuveen Tradewinds Emerging Markets fund, noted that companies focused on domestic consumption in China are trading at enticing prices.

"For a long-term investor, some of these [H-share] valuations are quite compelling," she said, adding that the steep declines are not affecting her outlook for the Chinese economy as the losses in wealth among the relatively small percentage of Chinese who own stocks are not likely to dent the country's expected GDP growth of 7 percent.

Frederick Jiang, co-manager of the $724 million Ivy Emerging Markets Equity fund, echoed that sentiment.

"If you look at the Chinese market, it's a bipolar market with the high growth A-shares trading at very expensive valuations and the H-shares trading below 10. It's probably the cheapest major market in the world," he said.

Jiang, whose fund has large positions in the H-shares of Chinese companies including Fosun International and Bank of China, said he did not see any evidence that the booming stock market affected personal consumption levels in China apart from major city housing prices and thus expects the effect of the market decline on spending to be muted.

High levels of margin trading coupled with a frenzy among Chinese investors for A shares – yuan-denominated shares listed in China – sent valuations above 50 times earnings this year. H shares, by comparison, trade at approximately 10 times earnings.

To be sure, finding true price to earnings ratios and other valuation metrics for Chinese companies can be difficult given the scant accounting laws and other forms of investor protection.

Stretched margin levels are one reason why Robert Bao, portfolio manager of the $2 billion Fidelity China Region Fund, is most worried about China's brokerage sector. "What does this mean to their earnings and balance sheets?" he said. "And they're very levered to the stock market."

Yu Zhang, lead manager of the $5.9 billion Matthew Asia Dividend fund, said the market decline could lead to more monetary easing in China, which in turn would boost the appeal of high-dividend paying stocks.

"We're not sure how long this volatile period will last, but to me the medium- to long-term outlook for China is still trending up," he said.

POPULAR BET

The market plunge comes at a time when China had become an increasingly popular option for both retail and professional investors in the United States.

Retail investors have sent $3.4 billion to China-focused mutual funds and ETFs for the year to date, the largest amount since 2009, according to Lipper data.

International funds, meanwhile, now have an average of 3.2 percent of assets invested in China, up from 2.2 percent in 2012, while U.S. large cap funds that own Chinese stocks have an average of 2 percent of assets in Hong Kong listed companies, up from 1.3 percent in 2012.

Even as he expects those fund inflows to reverse course, Jiang, the Ivy fund manager, said Beijing still has further policy moves to make in order to stabilize the market.

"When your house is on fire, you find a way to put it out," he said. "Then you can talk about the market finding a natural bottom."

(Reporting by David Randall, Rodrigo Campos and Tariro Mzezewa.; Additional reporting by Nichola Saminather in Singapore; Editing by David Gaffen, John Pickering and Rachel Armstrong)