A strong earthquake which shook China's Sichuan Province and higher inflation failed to rock Shanghai stocks last week, indicating that investor confidence has returned, analysts said.

The Shanghai Composite Index, which tracks yuan-denominated A shares and hard-currency B shares, added 0.3 percent to end at 3.624.23 last week despite a slew of negative news.

An 8.0 magnitude earthquake hit Sichuan Province last Monday, killing at least 32,476 people. But the disaster didn't rock the index, and investors, sensing an opportunity, sought stocks related to reconstruction in the belief that these companies would reap the benefits of infrastructure rebuilding.

Also on Monday, banks' reserve requirement ratio was raised to a new high of 16.5 percent to fight inflation which rebounded 8.5 percent in April.

''Few new policies are expected soon and pressure from the expiry of lock-up shares will ease temporarily after Bank of Communication's 13.2 billion shares were freed after their lock-up period expired last Friday,'' said Qian Qimin, an analyst at Shenyin & Wanguo Securities Co. He expects the index to move between 3,500 and 3,700 points this week.

Last month, the combined size of mutual funds managed by overseas institutions to trade yuan shares jumped by more than 40 percent as investors poured into the market. The cumulative size of the 19 funds under the Qualified Foreign Institutional Investor scheme reached US$8.4 billion as of April 30, against US$5.95 billion yuan a month before, fund research firm Lipper said.

''Some QFIIs began applying for a higher quota after the securities watchdog resumed approval, which showed that valuation of some A-shares is still underestimated,'' said Zhang Gang, an analyst of Southwest Securities Co.

Zhang predicted the index to fluctuate between 3,550 and 3,800 points this week and suggested investors focus on the agriculture and pharmaceutical sectors.

(Shanghai Daily May 19, 2008)