A continued flow of foreign funds helped China stocks shrug off a steep drop in the U.S. markets when Hong Kong re-opened Wednesday after a holiday.

Hong Kong’s blue-chip Hang Seng Index opened lower but ended 0.3% higher at 21,764 in heavier trading. The Hang Seng benefitted because a large part of the incoming foreign investment headed toward Hong Kong properties. The index of Chinese companies, however, fell 1.0% to 10,639.

The downturn reversed the trend of the October rally in which Chinese H-shares have risen about twice as fast as the Hang Seng Index.

But China-related stocks will probably quickly resume their strong gains, according to Castor Pang, head of research at Core Pacific Yamaichi.

“With the inflow of foreign funds the overall orientation is bullish, and particularly bullish about the prospect of economic recovery in China,” Pang told Equities. “China-related stocks will out-perform.”

Short-term gainers may include basic resource-producing companies like steel and aluminum, he said. But investors should be wary because these sectors are burdened with over-supply problems.

Instead, Pang favors electricity, oil and gas companies. He cautioned that investing power-generating stocks can be tricky because of regional variations in demand. One company he likes is Huaneng Power (HNP). End

DAILY FIX

Hong Kong Blue Chips: +66, +0.3, to 21,764, 10-24-12, Hang Seng Index

Chinese Stocks in Hong Kong: -104, -1.0%, to 10,639, 10-24-12, HSCE Index

Shanghai Stocks: +2, +0.1% to 2,116, 10-24-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: -4.7, 387.6, 10-23-12, Bank of New York Mellon, ADR Index-China

Insight: After Tuesday’s holiday Hong Kong blue chips re-opened 130 points lower due to losses in the U.S., but a surge of foreign funds lifted them to a 66-point gain at the close. Turnover rose. China Mobile (CHL) climbed 2.2% on good third quarter results. Much of the money coming from overseas went into Hong Kong properties: Cheung Kong (CHEUY) +5.0%.. KGI Research

Quotable: “We expect the Hang Seng Index to make a technical correction in near term but market outlook for November is still positive given the removal of political uncertainty in China and continuous inflow of funds into Hong Kong.” Guoco Capital. 10-24-12

Chinese Company to Watch: Shineway Pharmaceutical (CSWYY) “Maintain BUY with target price of HK$15.15, based on 13x 2013F PE or 1x PEG. We believe the company’s enhanced product mix and strengthened sales network will help it to continue strengthening its market leadership.” UOB Kay Hian. 10-24-12

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN