Brokerages have rushed to recommend "undervalued" stocks of state-owned enterprises (SOEs) to their clients, while fund managers are actively promoting exchange-traded funds (ETFs) targeting the sector, after China's top securities regulator called for better understanding of SOEs' intrinsic value early this week.

China has stepped up efforts to reform its SOEs over the past three years to make them leaner and stronger, but that has done little to change the West's perception that SOEs are inefficient and tend to overlook private shareholders' interests.

The endorsements come on the heels of President Xi Jinping's pledge last month to "unswervingly consolidate and develop the public ownership system", accelerate state economy restructuring, and make SOEs "stronger, better, and bigger."

Shares of SOEs have outperformed the broader market this week. An index tracking central SOEs has gained more than 3%, compared with the almost flat benchmark Shanghai Composite Index.

State firm China Railway Construction jumped about 11% this week, and China Communications Construction surged roughly 25%, on track for its biggest weekly gain in seven years.

Yi Huiman, chairman of the China Securities Regulatory Commission, urged the securities industry to explore an idiosyncratic system to value different types of stocks, so as to better allocate resources.

"Excessively low valuations of listed SOEs have hampered their ability to develop through additional share sales, M&A, or restructuring," Shenwan Hongyuan Securities said in a report this week that promoted SOE revaluation.

Central SOEs, which are controlled by the Chinese central government, trade at 9 times earnings, compared with 16.8 for the broad market, and 43.9 for listed private companies. That means private firms in China are roughly five times higher valued than their state peers.

Investing in SOEs is safe and potentially rewarding as these firms are key to China's national security and technological innovation amid "power rivalry", Shenwan Hongyuan said.

Industrial Securities Co said central SOEs are the main force in China's quest for tech self-dependency and supremacy, so SOE reform and innovation is "the propeller for revaluation."

Other brokerages, including Haitong Securities, Citic Securities and Guotai Junan Securities, joined the chorus of support for SOE revaluation.

To help channel capital into the state sector, the China Securities Index Co published a raft of new indexes this month targeting state-owned technology, energy and high-dividend companies.

The state-owned index publisher is also rolling out a series of SOE-focused corporate bond indexes, to encourage fund managers to create ETFs.

"The window is opening for SOE revaluation," Bosera Asset Management Co said in a statement on Thursday, promoting an ETF based on the CSI Central-SOEs Tech Innovation Index.

But this system with Chinese characteristic clashes with western criteria, said some overseas fund managers.

U.S. asset manager WisdomTree Investments runs a China-focused ETF that carves out SOEs, believing that shareholder returns are not the top priority for these companies and that they adhere more to government wishes.

As China continues to grow, ultimately, "private companies generate better profitability than state-owned companies," said Liqian Ren, who manages WidsomTree's China investments.

Thomas Masi, New York-based partner and equity portfolio manager at GW&K, said he, too, largely avoids Chinese SOEs due to fears of conflict of interest.

"If the company is super successful, that's not enough for us. What we ask is, are shareholders going to benefit or will the government request the company to use cash a certain way or do national service," Masi said.

(Reporting by Samuel Shen and Brenda Goh; Editing by Vidya Ranganathan and Ana Nicolaci da Costa)

By Samuel Shen and Brenda Goh