China stocks continued their march forward Tuesday, with signs emerging that institutional investors are starting to think about jumping in.

The Hang Seng Index in Hong Kong cleared the 20,000 hurdle, closing 0.4% higher at 20,073. Turnover was moderate but higher than recent levels. The index of Chinese companies gained 0.4% to 9,852.

The Hang Seng has soared 6.3% since July 25, even though the European Central Bank and the U.S. Federal Reserve Board disappointed investors by failing to deliver much-expected economic stimulus.

And there may be more to come, said Steven Leung, director of institutional sales at UOB Kay Hian Holding.

“In the near term, momentum is up,” he said. “Even though turnover is not up much, sentiment is good.” He thinks the market could rise to 20,300.

The market is warm and fuzzy largely because investors think falling inflation gives China room to loosen monetary policy further to bolster the struggling economy. China stocks could heat up considerably more if previously cautious big investors get on board.

“Long-term, institutional investors are considering whether to increase their holdings,” Leung told Equities. “They are watching economic statistics like upcoming CPI and PPI figures closely.” The CPI will be released August 9.

If Chinese inflation continues to drop as expected, he said, the big boys will likely go for high Beta stocks that are more likely to outperform the market. Much of the focus will be on big banks like ICBC (FXI) and CCB (CICHY) and insurers such as Ping An (PNGAY) and China Life (LFC), Leung said. End

DAILY FIX

Hong Kong Blue Chips: +74, +0.4%, to 20,072, 08-07-12, Hang Seng Index

Chinese Stocks in Hong Kong: +39, +0.4%, to 9,852, 08-07-12, HSCE Index

Shanghai Stocks: +3, +0.1% to 2,158, 08-07-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: +5.6, 376.7, 08-06-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips opened slightly higher and traded in a narrow range to end the day above the important 20,000 level. Esprit (ESPGY) soared 28.0% after a management change. KGI Research

Quotable: The index of Chinese companies — “H shares,” “As a whole,…we expect a volatile market but sentiment will gradulally improve towards end-’12 or early-’13.” UOB Kay Hian Holding. 8-6-12

Chinese Company to Watch: “CCB is one of the four largest banks in China. Last week, share price rose above the 5-month downtrend and 50(-day moving average). Trend remained solid thereafter .” Guoco Capital. 8-6-12.

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