Shanghai Composite ignores good news China's benchmark equity index seems impervious to good news. Despite a brightening domestic economy, a successful transfer of power in Beijing and efforts by regulators to boost participation, the Shanghai Composite has tumbled. On Tuesday, it closed below 2,000 points for the first time since January 2009. The Shanghai market is largely closed to foreign investors, who can only access mainland-listed shares, known as A-shares, through a restrictive quota system. Instead, global investors tend to buy Chinese companies via their Hong Kong listings, or H-shares. These have rallied 15 per cent since September as foreigners turn more bullish on Asia's largest economy. The domestic Chinese investors who dominate trading in Shanghai have had plenty of bad news to weigh up over the past couple of years. China's economy has slowed for seven straight quarters and is on track to record its lowest annual rate of growth for a decade this year. There are concerns, too, that the political paralysis surrounding the country's once-a-decade leadership transition has delayed needed reforms. Indeed, many Chinese investors have simply given up on equities and moved to other investments such as property, gold or high-yield wealth management products. China experienced an equity market bubble in 2007, when the Shanghai index topped 6,000 points before slumping to 1,700 in less than a year. Having been burnt once, many would-be equity investors now prefer investment products offered by banks, which they believe will provide them with a decent return. A boom in corporate bonds has also sucked a large amount of capital from the stock market. Hence the apparent unresponsiveness to more positive news. Recent data from China suggest its economic slowdown may have run its course. Trade figures for October showed a bounce, while manufacturing, industrial production and retail sales have all turned a corner. Fears over a hard landing, at least in the short term, have eased. The mainland stock market has shown no signs of improvement this year, lagging behind other equity indices. The Shanghai Composite is the worst performing main index in Asia, falling 10 per cent in 2012 and now flirting with lows last seen in the wake of the collapse of Lehman Brothers. On Wednesday the index took another downward step, dropping 0.9 per cent to 1,973, leaving the market trading at 8.4 times estimated 2013 earnings, compared with an average of 11.2 times for Asia ex-Japan. Energy-related stocks have been the biggest drag this year, with PetroChina down 12.6 per cent, China Shenhua Energy off 11.6 per cent and Sinopec lower by 18 per cent. Yet there are some bright spots, such as property shares. Poly Real Estate, for example, is up 31.4 per cent since the start of the year. Shanghai's weakness has flown in the face of efforts by Chinese regulators to boost international participation. In June, Beijing relaxed rules for foreign investors wishing to apply for a licence to trade shares on the mainland, while officials from the Shanghai and Shenzhen exchanges travelled to Japan, Europe and the US in September in a bid to attract new investment. Where there have been clear signs of life is in Hong Kong. The Hang Seng China Enterprises Index (HSCEI) - the index of H-shares - has rallied strongly since September, as the latest round of quantitative easing, or emergency asset-buying, by the Federal Reserve has spurred investors to look to riskier assets. Recent fund flow data have also pointed to a growing appetite for China. Last week, investors added $341m to China funds, making it the top country pick among global emerging markets, according to data from EPFR. An October survey of global fund managers conducted by Bank of America Merrill Lynch showed confidence in the Chinese economy had surged to its highest level since July 2009. International investors need not see the poor performance of equities in Shanghai as a negative indicator of broader economic sentiment in China, says Jonathan Garner, head of Asian and emerging market equity strategy at Morgan Stanley. "The A-share market is segmented, domestic and retail-investor driven," says Mr Garner. I don't buy the idea that it tells you anything about the economy. Andrew Swan, head of Asian fundamental equities at BlackRock, believes many foreign investors had simply become overly worried about the state of China's economy and are now slowly putting money back into the market via H-shares and China funds as the economic data improves. "Unless the China story completely derails, you're not paying very much for growth," says Gigi Chan, who manages the China opportunities fund at Threadneedle Investments. Not everyone is convinced. John Woods, chief Asian strategist at Citi Private Bank, reckons the Hong Kong rally will crack. He says: "I don't think there are any more prescient investors than A-share investors and they really haven't bought into the [H-share] enthusiasm." He believes the market should be more concerned about corporate profitability. "There's an awful lots of expectation, everyone is focused on valuation," says Mr Woods. Just because it's cheap, doesn't mean it can't get cheaper.