CalSTRS had roughly $3.7 billion worth of investments in Chinese equities at the end of June through both internally and externally managed strategies, the No.2 U.S. pension fund said in a statement to Reuters.

The fund floated a request for proposal (RFP) last month for fund managers with a plan to establish new investment categories targeting Chinese equities. Interested funds were required to respond to the proposal by Oct. 10.

The purpose of taking proposals from China-focused managers is "to find out if there may be a better way" to implement the existing China equity exposure, the pension manager said in the statement.

CalSTRS' plan comes as asset allocation to Chinese equities by deep-pocketed U.S. institutional investors has been stagnant overall for the past few years due to rising geopolitical tensions.

Some of Asia's large China-focused hedge funds are also buying more non-China stocks as regulatory scrutiny, policy uncertainties and a slowing mainland economy force them to cut exposure to offshore Chinese assets.

Recent moves by some big investors, however, suggest that they are seeking asset and geographical diversification as the western world grapples with tighter Federal Reserve policy and an energy crisis in Europe, according to industry insiders.

As part of the new plan, CalSTRS, which had assets worth around $311.7 billion at the end of July, plans to establish three investment strategy categories targeting China, according to the RFP published on its website.

While two of them will focus on Greater China equities and onshore Chinese shares, the remaining one will be benchmarked to the MSCI China index, according to the RFP.

"Depending on our RFP due-diligence findings, we (CalSTRS) would create new China portfolios if we determine it would be a better way of implementing our existing China equity exposure," it said in the statement to Reuters.

(Reporting by Xie Yu; Additional reporting by Summer Zhen; Editing by Sumeet Chatterjee and Muralikumar Anantharaman)

By Xie Yu