Investors have ridden a wave of buying into big-capitalized stocks with solid earnings in the first half of 2003, exorcizing Shanghai's equities market of its falling course that started last year.

The Shanghai Composite Index, which tracks both yuan-denominated A shares and hard-currency B shares, closed at 1465.82 yesterday.

Although the market is already off 10.2 percent from this year's peak of 1631.47 on April 15 , the index has risen 8 percent from January 1.

"Compared with the pattern last year, the market is in an upbeat scenario," said Wu Kan, head of the investment consulting department of Shanghai Securities Consulting Co Ltd. "The market is moving in a way that investments are based more on the profitability of listed firms than speculation."

Last year, China's stock markets tumbled nearly 17 percent, battered by a negative fallout of the sales of a large amount of state-owned equities and the government's crackdown on the flooding in of illegal capital.

Although the broad-based fall has left the overwhelming majority of investors severely burned, blue-chip stocks with large capitalizations have also been oversold in the sell-off, making them good buys due to the lower valuations.

From the start of the year, automobiles, steelmakers and banking stocks have gained more than 50 percent as fund managers have built heavy positions in the three sectors. They believe China's fast-growing economy would translate into solid earnings for publicly traded companies.

On the flipside, small-capitalized stocks, which used to skyrocket due to their easy exposure to manipulation, have dropped into negative territory as their fundamentals mismatch the valuation.

"In terms of the numbers, only 20 percent of big-cap companies were on the upside in the first half of the year. The remaining 80 percent were on the downside," said Shanghai Securities's Wu.

"But given the heavier weightings of the big-capitalized stocks in the index, their gains outweighed the weakness of the small-caps."

However, the rally came to a stop in April when SARS began to ravage the country. The outbreak shattered the investment confidence that had just been put on a recovering course.

The severe acute respiratory syndrome weighed down sentiment, making the broad market retreat to the 1,500 points level.

The soured sentiment has proven to be long-lasting with the market currently languishing around the 1,500 point mark.

"If there had not been SARS, the market would not have staged a correction of such a magnitude that would have lasted a long time," Wu said.

Last month also saw a high-profile event in China's stock market as foreign investors made their first purchase of the local-currency A shares.

On July 9, UBS AG, Europe's largest bank, purchased an undisclosed amount of A shares in Baoshan Iron & Steel Co Ltd, ZTE Corp, Shanghai Port Container Co Ltd and Sinotrans Air Transportation Development Co.

Analysts said foreign investors are not likely to dominate domestic stock tradings at this stage as their buying into stocks was only symbolic.

Instead, the bond market has fallen from favor with select foreign investors as a slew of capital from several qualified foreign institutional investors, or QFII, has now been found to flow into the bond market.

Even so, analysts said there would be still opportunities for equities investments in the second half of the year, boosted by the bolstered economy.

"That the economy will continue to grow at a fast pace is expected to be translated into a bullish sentiment on the stock market," said Jiang Hui, fund manager of China Asset Management Co Ltd.