The nation is the fastest-growing holder of its neighbor's equities as investors diversify their portfolios

SEOUL, South Korea - China, which has the world's largest foreign-exchange reserves, has become the fastest-growing holder of South Korean stocks as investors make efforts to diversify investments.

The value of South Korean stocks held by Chinese investors' rose 25 percent during the first quarter to 3.8 trillion won ($3.5 billion), according to Bloomberg data. That's the fastest pace among all countries, according to South Korea's Financial Supervisory Service.

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The United States remains the top overseas holder after boosting its share by 2.8 percent to 155 trillion won.

"Chinese investors like ourselves are investing in South Korean stocks because that country's economy may benefit most from the global economic recovery," said You Linfeng, a Beijing-based fund manager at ICBC Credit Suisse Asset Management Co, which oversees $9.2 billion in assets.

"Korean companies in industries such as consumer and infrastructure are cheap," said You, who allocates about 5 percent to Korean stocks in two global funds and might increase the investment.

China may more than double the number of mutual funds that can invest overseas this year to 60, spurring inflows into other emerging markets and slowing the yuan's appreciation, according to Z-Ben Advisors, a Shanghai-based fund tracker. Chinese residents can hold global stocks and bonds only under the country's qualified domestic institutional investor (QDII) program.

China's regulators allowed domestic fund managers, insurers and banks to sell a combined $68.4 billion of QDII funds as of the end of last year. That's a fraction of the nation's foreign reserves, which increased by a record $199 billion in the fourth quarter to $2.85 trillion. China Investment Corp plans to invest at least $100 million in South Korean shares, the JoongAng Ilbo newspaper reported on March 30.

Shares on the benchmark KOSPI are valued at 10.9 times earnings, the lowest in Asia apart from Vietnam and Pakistan.

The gauge rose 2.7 percent in the first three months of the year, the ninth quarterly advance.

Bloomberg News