Industry players said that the government must improve consumer confidence to drive economic growth and attract institutional investor interest.
"Because real borrowing costs are so high, you can't expect public confidence to come back," said Lo Chi, senior market strategist for Asia-Pacific at BNP Paribas Asset Management, based in Hong Kong. "We need to see Beijing come out with broader easing measures, more aggressive easing, especially on the monetary policy side."
"Incremental easing will not do the magic to turn around confidence; we need something drastic. And that drastic (measure) has to come in a shock, you know, one time, two times, maybe three times, then when that clicks, confidence comes back, then the PBOC can ease back and go back to the incremental easing or neutral policy stance," he opined.
"If I'm right on that, I think the outlook for Chinese stock market asset prices is quite positive," he said.
BNP Paribas Asset Management has €532 billion ($571.8 billion) in assets under management.
Mainland Chinese stock markets have been in decline this year, with the CSI 300 index falling 8.03% from its peak of 4201.35 on Jan 30.
"At this point, the whole world is very bearish on China, although I am not that negative. As a contrarian, I think this could be a good time to buy Chinese stocks, especially if the picture I am now talking about more aggressive easing comes in the next few months … We could possibly see a revival of a Chinese stock rally late this year into next year," Mr. Lo said.
The risk-reward for Chinese equities remains attractive, said Marcella Chow, executive director and global market strategist of the $2.8 trillion J.P. Morgan Asset Management, based in Hong Kong. But there is still a lack of risk appetite among institutional investors due to the uneven economic recovery, lower property prices, and the recurring market underperformance, she said.
Investors are keeping their eye on the July economic data, which coincides with a Politburo meeting, that will confirm the pace and speed of this year's recovery, as well as companies' interim results that will be released in August, she added.
"That will also shed more light on the potential operating efficiency improvements, especially with the recent hype on the state-owned enterprises and also the VCC (valuation system with Chinese characteristics)," she said.
The valuation system with Chinese characteristics, first mentioned by a regulatory official in November, involves the revision of metrics to measure the performance of state-owned enterprises. However, Ms. Chow said investors are still grappling with how sustainable the new system is or whether it is an accounting tweak that businesses will take advantage of.
"That takes time; just maybe a few months won't prove it. So investors should pay attention to corporate guidance and key metrics like return on equity and also dividend payout rate, and judge not just on one quarter's release, but on a few quarters to judge whether this has significant improvement," she said.
North American institutional investors will have an even more difficult time being convinced that mainland investments are worth their time.
"The U.S. has just launched a finance/investment war against China," said Wong Kok Hoi, Singapore-based founder of China-focused hedge fund APS Asset Management, with $2.5 billion in AUM. "It has pressured its institutional investors to exit China's capital markets including private equities. It has also persuaded its allies to do the same. For instance, several large Canadian public pension funds were summoned to their parliament in May to defend their China investments."
"To them, China has therefore become 'uninvestible' from the political standpoint and not from the fundamental standpoint. I think many will sell to zero and wait for the geopolitical climate to improve. On the fundamental front, things will continue to improve. China's GDP growth this year is very likely to surpass 5%, which will be the best amongst the major economies and valuations are modest," said Mr. Wong.
"More importantly, you will see new industries like EVs, factory automation companies, and hard tech companies becoming leading and successful companies. It is these industries that investors should stay invested in," he said.