Although leery about Chinese stocks despite another day of gains for the beleaguered market, some money managers are beginning to look for bargains.

The Shanghai Stock Exchange Composite Index added 2.39 percent Monday after recovering 6 percent last week. The Shenzhen Stock Exchange A Share Index rose 4.18 percent, but is still down more than 30 percent since last month, according to Bloomberg.

Stocks on the mainland began tumbling in June, and the selling continued this month, forcing the government to take extraordinary measures.

The China Securities Regulatory Commission prohibited major shareholders and senior executives of listed companies from selling stocks in their own firms for at least six months.

Also, China's top brokerages agreed to purchase $19.3 billion worth of shares backed by funding from the People's Bank of China (PBOC), and margin selling has been curbed.

The A shares are publicly traded companies in China that list on the Shanghai or Shenzhen stock exchanges, while H shares represent publicly traded Chinese companies listed on the Hong Kong Stock Exchange.

Safa Muhtaseb, portfolio manager at ClearBridge Investments in New York, which has nearly $118 billion in assets under management, said his firm doesn't invest in the volatile A shares on the mainland.

"Valuations are too high for both the new economy technology and Internet names on the Shenzhen exchange and the more traditional financials, infrastructure and telecom companies on the Shanghai exchange," he said in an e-mail.

"We also have concerns about the corporate governance practices of mainland-listed companies, the quality of their accounting and disclosures, as well as the general lack of liquidity in the A-shares market," he said.

Muhtaseb said that most sectors that were expensive before the selloff remain pricey. However, increased market volatility has created some opportunities in certain stocks in the consumer and financial sectors.

"We have used the selloff to add to our positions in stocks including Biostime, a maker of baby formula, and Greatview Aseptic Packaging, a manufacturer of plastic wrap and food packaging, which cater to the convenience needs of consumers moving from farms to cities.

"We also like sports apparel and footwear designer and manufacturer ANTA Sports Products, which appeals to a heightened interest in sports and physical health, and Cosmo Lady, whose niche is intimate apparel," Muhtaseb said.

Muhtaseb favors the H shares that trade in Hong Kong for Chinese stocks. "We have also considered investing in Chinese companies listed on US exchanges, but have yet to do so," he said.

Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management, said he is neutral on the Chinese MSCI index, which tracks the H-share market in Hong Kong. "We do not offer recommendations on the A-share market," he wrote in an e-mail.

"Attractive valuations and support from the PBOC are positives for MSCI China, which are offset by high volatility and headwinds to profit growth as the economy slows down. We prefer to play China exposure through Asia high-yield bonds. Chinese bonds account for about 40 percent of the Asia HY (high-yield) bond index," Mariscal said.

Assuming the selloff continues to wind down, Mariscal said "we favor the banking and insurance sectors (excluding brokers) and healthcare. Banks are attractively valued, and we like the growth potential and defensive nature of HC (healthcare)."

There is a price gap between mainland-listed shares and those that trade in Hong Kong, as the H shares lagged in the bull market.

"Despite the correction in the A-share market, the H shares still trade at a significant discount. The greater accessibility of H shares for foreigners and their lower relative volatility (when compared with A) also make them more interesting for our client base," said Mariscal.

paulwelitzkin@chinadailyusa.com