(Bloomberg) -- A rally in Chinese stocks has sent a number of benchmarks surging 20% from lows, a sign that the battered market may be headed for a more sustainable uptrend after multiple false dawns over the past year.

The Hang Seng Tech Index became the latest gauge to enter a technical bull market during Tuesday trading, joining the ChiNext gauge of China’s growth shares and other sectoral indexes on materials and renewables to hit the milestone. 

The current sentiment marks a sharp improvement from just months ago, when Chinese shares were among the world’s worst performers and some big-name investors were cutting exposure. Beijing’s determination to end a rout, signs the economy and earnings are picking up, and a return of foreign inflows have given investors from abrdn plc to M&G Investment Management reasons to believe that the market is bottoming out. 

“It’s rare to see China’s markets sustain a rally for weeks since the second half of last year,” said Fanwei Zeng, investment analyst at GAM Investment Management. “Most Chinese tech and renewables companies have been focusing on cost cutting and improving efficiency; we’ve seen improvements in margins and decent topline growth.”

The upswing shows investors are coming to terms with China’s attempts to restructure its economy, with some betting that President Xi Jinping’s attempt to drive high-tech growth and end a property crisis will start to bear fruit. A steady stream of policy support — from a cut to the mortgage reference rate to more liquidity and crackdown on quants — is stacking up, even though some investors decry the lack of a big-bang stimulus. 

The CSI 300 Index of mainland shares has gained about 13% since a five-year low reached Feb. 2. The Hang Seng Tech gauge advanced more than 4% on Tuesday, with Xiaomi Corp. contributing the most to the gains after the automaker announced it will start selling its long-awaited electric vehicles this month.

Beijing’s resolve to deliver 5% economic growth this year suggests incremental stimulus will continue to flow in, analysts said. Data show the economy is on the mend, with inflation back in positive territory for the first time since August and manufacturing and services no longer in deep slump. 

“We expect high single digit or low-teen earnings growth overall this year,” said Nicholas Yeo, head of China equities at abrdn plc. “We expect deflationary pressure to reduce this year which would provide companies with more pricing power. We are around the range of the bottoming.” 

Read: Xi’s High-Tech Drive Spurs Hunt for New Chinese Growth Stocks

Xi’s slogan of “high-quality development” — which prioritizes sustainable growth from high-tech industries over the debt-driven expansion of the past — is luring early bets from investors, who argue state support will drive industries from electric vehicles to hydrogen power, chipmakers and automation.

Traders are also rewarding better-than-expected earnings more generously. Li Auto Inc. and Xinyi Solar Holdings Ltd. each jumped the most in years after delivering better-than expected quarterly earnings, a reversal from last year when even positive results failed to boost stocks. 

“I think upping your allocation to China probably makes sense now,” Lazard Asset Management’s Chief Market Strategist Ronald Temple said in a Bloomberg TV interview last week. “China could be one of the best performing equity markets as a trade over the next 12 to 18 months.”  

Foreign money is trickling back in. A Morgan Stanley analysis shows global long-term investors have taken a pause in selling China, with some funds getting less bearish.  

Mainland shares saw 1.8 billion yuan ($251 million) of inflows this month through Monday. If the trend lasts, it will mark two straight months of net buying after a record six-month streak of outflows through January.   

Choppy Ahead

The upward path from here, however, may well be a slow and choppy grind. Deflationary pressure remains high and the external environment challenging with anti-China rhetoric expected to dominate ahead of the November US presidential election. 

Some of China’s market support measures, such as the clampdown on quant trading and massive purchases by state funds, have been controversial, with concerns that they can distort fair pricing and backfire later. Goldman Sachs Group Inc.’s wealth-management business is telling its clients not to invest in China as the economy struggles. 

“Stabilizing a stock market is different from a new V-shaped bull market recovery,” said Alan Richardson, senior portfolio manager at Samsung Asset Management. “Breaking above the previous high watermark is a completely different issue. Japan bottomed for 30 years and stayed L-shaped for that long as well.” 

The latest Bloomberg Markets Live Pulse survey showed about an equal number of investors planning to increase and decrease their exposure to the country over the next 12 months. 

Yet investors can also make a case that China looks attractive in global markets where record-breaking rallies have made places like India and the US prone to correction risks. 

The MSCI China trades below nine times forward earnings estimates despite the recent rally, compared to readings exceeding 20 each for the S&P 500 Index and MSCI Inc.’s India benchmark.  

“China is a constructive long-term investment market and valuations are low,” said Wei Li, a multi asset quant solutions portfolio manager at BNP Paribas Asset Management. “If you are looking for alpha, I highly recommend you look for that in China.”

--With assistance from Georgina McKay and Yvonne Man.

(Rewrites to reflect latest market moves)

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