SHANGHAI: China's smallest stocks are poised to fall as the government's approval of index futures prompt investors to switch to larger equities that are half as expensive, according to China International Capital Corp (CICC).

A 131 percent rally in the CSI Small Cap 500 Index last year drove its price-earnings ratio to 76.5 times, compared with 39 times for the CSI 300 Index, which tracks the 300 biggest stocks traded in Shanghai and Shenzhen.

"Valuations for small-cap stocks are looking stretched and news of the approval of index futures may spur a rotation into large-cap stocks," Gao Ting, Beijing-based strategist at CICC, the top-ranked brokerage for China research in the annual survey by Asiamoney magazine, said in a phone interview yesterday.