HONG KONG/SHANGHAI - As foreign funds head for the exit, Chinese stock investors are snapping up beaten-down shares of mainland firms, betting outside views of China are overly pessimistic.

The gap in perceptions between offshore and onshore investors is so divergent, it has driven the wedge between markets in Hong Kong and China to their widest in 13 years.

Hong Kong's benchmark Hang Seng plunged 15% in October - the biggest monthly loss in 14 years, as Chinese President Xi Jinping consolidated power at the twice-a-decade Communist Party Congress, which triggered concerns Beijing will sacrifice economic growth for ideology.

"Foreign funds were making a carnage of China assets," said Yuan Yuwei, a hedge fund manager at China-based Water Wisdom Asset Management.

Hong Kong stocks don't look promising in the U.S. rate hike cycle, "but with companies like Tencent falling to P/E ratio of just 9," further accelerated falls are not justified by fundamentals, he said over the weekend.

Amid the foreign selling, local money has poured into China's battered stocks via the Stock Connect scheme, with $12 billion flowing into Hong Kong in October, the biggest monthly volume since early 2021. Hong Kong-focused exchange-traded funds (ETF) also saw massive inflows. "We remain confident," said Wang Qing, chairman at Shanghai Chongyang Investment Management. "In our opinion, a major overhang was removed after the conclusion of the Party Congress," he said, adding he expects China will gradually exit its zero-COVID strategy.

The asset manager added positions in industry leaders with extremely low valuations, including internet platform companies and some blue chip A-shares, because "both the trading behaviours and valuation look already extreme."

That contrasts with the views of overseas investors, many of whom fear Xi will prolong the strict COVID-19 policies and private sector crackdowns during his third leadership term.

Net selling from international active funds totalled around $30 billion in Chinese equities over the past year and global hedge fund allocations in Chinese equities have declined from 15% at the peak in 2020 to 8% now, Goldman estimates.

China stocks suffered $1.8 billion in foreign outflows via Stock Connect last week.

BARGAIN HUNTING

As China's top financial regulators sought on Wednesday to allay investor fears that economic growth remains a priority and reforms and liberalisation will continue, some saw the foreign selloff as a buying opportunity.

"This is the right time for action," Dean Li, a Shanghai-based individual investor, said. "I like pouncing onto potential high-flyers whose valuations are lying on the ground."

Li spent half a million yuan ($68,766) buying Hong Kong-listed Newborn Town Inc last week, when the Chinese social networking company fell to historic lows, and plans to buy more this week.

Domestic buyers have zoomed in on larger companies. Tencent , Wuxi Biologics, Meituan Dianping and Kuaishou Technology were on the top mainland buying list under the Connect last week amid foreign panic selling, according to Goldman Sachs.

Shanghai-listed ChinaAMC Hang Seng Technology ETF , one of China's biggest ETFs targeting the Hang Seng Tech Index, saw a nearly 40% jump in its shares in October, reflecting massive inflows as the tech index touched historic lows.

Yuan of Water Wisdom Asset Management added that despite the retreat by foreigners, there are many investment opportunities in China's A-shares, which are much less vulnerable to global flows.

Domestic stocks also benefitted from a largely state-owned financial sector who heeded the government's call to stabilise the market.

As testament to the diverging foreign and Chinese views, China-listed A-shares are now nearly 55% more expensive than their Hong Kong-traded peers, with an index tracking the premium hitting the highest since 2009.

Pruksa Iamthongthong, senior investment director of Asian equities at abrdn, who maintains an underweight rating on China, said she prefers the onshore to offshore market, citing policy tailwinds in areas such as digitalisation, health and green investment.

Pierre Hoebrechts, CIO at Hong Kong-based Arowana Asset Management, bought some large caps in financial and infrastructure sectors last week.

"These companies are not going out of business unless you think the end of China is coming, which seems to be a ridiculous argument to us," he said.

"If you are a long-term investor, and you don't start to buy China at this level, one has to wonder when you would ever buy it."

($1 = 7.2710 Chinese yuan)

(Editing by Vidya Ranganathan and Jacqueline Wong)