By Samuel Shen and John Ruwitch
SHANGHAI, Nov 2 (Reuters) - Foreign holdings of Chinese shares exceeded 1 trillion yuan ($151.1 billion) for the first time in September, central bank data showed on Thursday, as capital market deregulation and MSCI's China inclusion fuelled demand for select blue chips.
Foreign holdings represent just 1.7 percent of China's nearly $9 trillion market capitalisation, but a growing number of overseas investors are targeting companies with stable yield, or "new economy" stocks - such as consumer goods firms and drugmakers - that promise high growth potential.
"Overseas investors are attracted to A-share companies that cannot be bought elsewhere, such as Moutai, or Wuliangye," said Bin Shi, head of China Equities at UBS Asset Management (Hong Kong) Ltd, referring to China's popular alcohol producers.
With hundreds of billions of dollars flowing in and targeting a small number of companies, "the accumulative impact should not be underestimated," Shi said.
By the end of September, foreign holdings in yuan-denominated A-shares hit a record 1.021 trillion yuan, up 50 percent from a year earlier, the data showed. A year earlier, the figure was 656.2 billion yuan.
Foreign investor interest has heightened as Beijing opened its capital markets wider to woo inbound investment over the past year. In December 2016, China launched the Shenzhen-Hong Kong Stock Connect, broadening a cross-border channel that already linked Shanghai and Hong Kong.
U.S. index publisher MSCI's decision to include China A-shares into its global indexes next year added further momentum.
"Global capital is gushing into China," said Ma Xixun, executive director at asset manger PinPoint. "Foreign investors are realising that being consistently bearish on China is not good for their fund performance."
Foreign capital worth more than 300 billion yuan has so far flowed into Chinese stocks via the Connect scheme, boosted by strong demand for companies ranging from home appliance makers Midea and Gree, to electricity giant Yangtze Power and diary producer Yili.
Another investment channel, the Qualified Foreign Institutional Investor (QFII) programme, also showed a preference for blue chips.
The CSI300 index has risen 20 percent so far this year. In contrast, start-up board ChiNext, once the darling of local investors and a hotbed for speculation, has slipped 5 percent.
Illustrating the bigger presence of overseas investors in China, Hengrui Medicine's and liquor maker Kweichow Moutai's top shareholder list is crowded with foreign institutions. These include among others Oppenheimer Funds Inc, Norges Bank Investment Management and Fidelity Management & Research Co.
And both these companies have seen their share price soar more than 80 percent this year.
Investment trends are changing as a result, with the Warren Buffet-style of "buy and hold" investing becoming more popular in a market accustomed to speculative casino-like behavior, Shi at UBS Asset Management said.
"Previously, China's A-shares changed hands mainly among local investors...but with increasing foreign participation, China's market structure is changing."
He said the sharp rise in companies such as Moutai reflects their rapid profit growth as well as normalisation of valuations from previously ultra-low levels.
"The revaluation of China's blue chips is just under way, and is far from over."
($1 = 6.6183 Chinese yuan) (Editing by Jacqueline Wong)