* Foreign fund inflows to continue on China hopes
* Foreign equity buying at near 2-yr high in April
* Taiwan stocks No. 3 world performer in 2009 For more stories on Asia fund inflows [ID:nTP126890]
By Gina Chang
TAIPEI, May 4 (Reuters) - A recent surge of foreign funds into Taiwan could keep flowing in the coming months as investors snap up local stocks in the belief the market will outperform global peers with its growing ties to China's resilient economy.
Taiwan's benchmark TAIEX .TWII has risen nearly 40 percent so far this year, making it the world's best-performing market open to foreign investors. The only better performers, both in China, are closed to most overseas investment.
"Warmer ties with China and fewer political risks all added to the market's attraction to foreign investors," said Andrew Deng, a vice president of Taiwan International Securities Corp.
The expected signing of a financial services agreement with China has been boosting local financial shares, which have gained about 43 percent since the beginning of March, compared with a 39 percent rise in the broader market.
China's stimulus spending, aimed at boosting electronics and car sales, has also helped fuel recent rises in technology and auto shares, with investors expecting China to launch similar packages to keep its economic growth at 8 percent this year.
However, analysts cautioned the strong foreign fund flows to Taiwan could slow or even reverse over the longer term if the global economy did not improve in the second half of the year or if cross-Strait ties sour.
"Better ties with China is a growing trend as it helps local markets to normalise. But all the improvement could come to a halt if Taiwan and China's relations worsen again," said Robert Hsieh, a vice president of Shin Kong Investment Trust.
In April, foreign institutional investors bought T$103.7 billion ($3.1 billion) worth of local shares, their largest net monthly purchase since June 2007, when the net buying was at T$185 billion.
On a broader basis, foreign fund net inflows reached $1.9 billion in March, a level not seen since March 2008. And, on April 30, foreign investors bought a net T$32.99 billion worth of Taiwan stocks, the fifth-biggest daily foreign buying on record, after local stocks logged their biggest single-day gain in more than 18 years. [ID:nTPU001340]
The foreign buying binge of Taiwan stocks over the past four weeks was the second-biggest among major Asian countries, after only South Korea's $2.5 billion and accounting for nearly a third of foreign fund purchases over the same period in Asia, excluding Japan, Nomura statistics showed.
The huge inflows marked a sharp turnaround that saw foreign money leaving Taiwan since last July as the global financial crisis unfolded.
"Warming cross-Strait ties will bring structural improvements to Taiwan's economy, especially the financial and domestic consumption sectors," said Wendy Kuo, chief investment officer of Yuanta Funds, whose fund size was the fourth-largest in Taiwan, according to the latest data.
Fidelity International held a similar view, and planned to raise up to T$6 billion for investment in Taiwan for a Greater China fund, said associate director Ann Chang.
"The positive effect from China will help Taiwan stocks sustain their strong momentum," she said.
Foreign investors have been actively buying local technology bellwethers, such as TSMC (2330.TW) (TSM.N) and AU (2409.TW), and major financial firms including Cathay Financial (2882.TW) and Chinatrust Financial (2891.TW) in recent months.
Analysts said technology shares and financial issues, the top weighted sub-indexes on TAIEX, will continue to be the most favourable sectors for overseas investors in coming months. (US$1=T$33.0) (Additional reporting by Faith Hung; Editing by Jean Yoon)