An extension of the rally would give investors another chance to profit after they pulled almost US$700 million from US exchange-traded funds tracking China stocks since the advance started, the biggest outflows among emerging markets.

Chinese shares are rebounding as policymakers accelerate spending and loosen some banks' reserve requirements to keep economic growth from slipping below their 7.5 per cent annual target.

"Usually when you enter a phase like this, you're looking at at least 20 per cent upside" from current levels, Mobius, who oversees more than US$40 billion in emerging markets, said in an interview. "If you look at the valuations of SOEs, you'll see that they are very cheap."

Even after the advance, the gauge of mainland companies listed in Hong Kong, known as H shares, is valued at 7.3 times estimated earnings for the next 12 months. That is the lowest multiple in emerging markets after Russia's Micex index.

Mobius' rally forecast pits him against bearish analysts at Bank of America and Deutsche Bank. Bank of America's David Cui, the No1 ranked China strategist by magazine, said that the stimulus that is sparking the rally is actually making equities less appealing as leverage rises and free cash flow dwindles.

Deutsche Bank's John-Paul Smith reiterated this month his concern that rising debt levels pose a risk to China's economic stability.

PetroChina, Industrial and Commercial Bank of China and Bank of China have contributed most to the H-share index's rebound as President Xi Jinping pushes to increase the role of private investors in state-owned companies.

Templeton's holdings include shares of Beijing-based PetroChina, Guangzhou Automobile, China Merchants Bank and Aluminum Corp of China, according to fund data.

PetroChina, the mainland's biggest company by market value, is considering opening up pipeline, exploration and refining units to private investment. The company said in May it will sell assets valued at 39 billion yuan (HK$49.05 billion).

"The focus on state-owned companies is simply because of this reform programme," said Mobius, who declined to give a time frame for his prediction of a 20 per cent rally. "They're the biggest game in town."

Mainland investors are less enthusiastic about the government's plan to overhaul SOEs. PetroChina shares in Shanghai are valued at levels 12 per cent lower than those listed in Hong Kong and reached a record discount of 13 per cent this week. China Petroleum & Chemical Corp is 17 per cent cheaper on the mainland, while Agricultural Bank of China trades at an 18 per cent discount.

"Because sentiment is quite negative in China, they look at every piece of news as half glass empty," said Norman Chan, an investment director at NAB Private Wealth Advisory in Hong Kong.

"The restructuring is perceived as a negative fix. But foreign investors probably have a different perspective, they probably think it will allow them to be more sustainable."

Mobius says valuations on SOEs are too low to pass up. PetroChina trades at about 12 times reported earnings, versus an average multiple of 20 for global peers. ICBC, China's biggest lender, has a price-to-book ratio of 1.07, about half the level of its historical average.

While concerns over rising bad loans have weighed on bank valuations as non-performing loans increased for the 10 quarters to March, Nikko Asset Management Asia says that shares will rally as government stimulus buoys the mainland economy.

"We have been underweight the Chinese banks for many, many years," said Peter Sartori, Singapore-based head of Asian equities at Nikko Asset.

"The time is right to reassess that. Banks have stopped underperforming. There will have to be more reforms in China for banks to start outperforming."