The narrowing valuation gap between China's stocks traded offshore and in Shanghai shows rising investor confidence in the future of the A-share market, observers said.

The MSCI China Index, the gauge for offshore stocks, is expected to rise more as the market opens up further to foreign investors, potentially boosting overseas investor sentiment, said analysts.

The index currently trades at 17.4 times reported earnings, compared with 17.5 for the Shanghai Composite Index, the narrowest gap since July 2014, reported Bloomberg.

The MSCI China Index gained 47 percent year-to-date while the Shanghai Composite Index rose 7.9 percent year-to-date, showing that overseas investors are investing actively in Chinese stocks, particularly those of internet giants such as Tencent Holdings Ltd and Alibaba Group Holding Ltd.

Brokerage CICC said in a research note that a more stable performance, expected growth in valuations and improving fundamentals are the major reasons why investors have been favoring A shares in recent months.

The price-to-earnings ratio of major Shanghai gauges was somewhere between 12 times and 15 times by the end of July, according to data of the China Securities Regulatory Commission.

That is still lower than that of the Dow Jones Industrial Average (21 times), S&P 500 (24 times), and FTSE 100(29 times).

Yet, overseas investors continued to buy A shares heavily in recent weeks through the Shanghai-Hong Kong Stock Connect program and the Shenzhen-Hong Kong Stock Connect program.

On Oct 9 alone, the first trading day after the eight-day National Day holiday break, overseas investors bought A shares worth 7.6 billion yuan ($1.15 billion).

Stocks of insurers, banks and white liquor stocks were most favored by investors.

A research note from Sinolink Securities said that improved return on equity or RoE, expectations of better liquidity (following the central bank's decision on Sept 30 to cut the reserve requirement ratio for some banks) and a stable monetary policy are all boosting hopes for a brighter future.

Steady gains by Hong Kong-listed stocks, which are closely connected to the A-share market, will also help boost investor sentiment toward Shenzhen-listed and Shanghai-listed stocks.

The Heng Sang Index, the Hong Kong market's benchmark, surpassed 28,480 points in the second week of this month, the best rally since December 2007.

For banks, insurers and property developers listed on the mainland bourses as well as the Hong Kong stock exchange, the rally could further boost valuations in the A-share market in the near future.

"Investor sentiment has been rising, and the bullishness can further extend, thanks to improved fundamentals," said Zhao Xianghuai, an analyst with Essense Securities.

In September, stocks worth 220 billion yuan in all were traded through the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, the highest since 2016, according to data of Wind Information, a Shanghai-based market information provider.