* Chinese insurers, mutual funds power Hong Kong stock rally
* Clampdown on WMPs make direct stock investing more popular
* Hong Kong shares less pricey than China, Asia ex-Japan shares
By Samuel Shen and Saikat Chatterjee
SHANGHAI/HONG KONG, Feb 20 (Reuters) - New rules giving Chinese insurers greater access to Hong Kong stocks and a crackdown on risky products at home are pushing mainland funds into the former British colony, driving the benchmark Hang Seng index to five-month highs.
Long-term capital from mutual funds is also seeping into Hong Kong equities, considered more attractively priced than those in China and some Asian markets on some valuation metrics.
"Chinese investors including mutual funds and major insurers have been steadily increasing their allocation to Hong Kong stocks," said Ye Hongbin, general manager at China Rater Investment Management Co, a Guangzhou-based hedge fund.
Brokerage Industrial Securities expects Chinese insurers to earmark 250 billion yuan ($36.5 billion) in fresh capital this year - about 3 percent of their total assets - while onshore mutual funds are set to pump in 50 billion yuan via the connect schemes.
Global markets have been rising on reflation hopes, but Hong Kong's 10-percent rise since the start of the year is benefiting from signs of stabilisation in China's economy and changes to investment rules.
Mainland insurers were permitted to invest in Hong Kong via the cross-border stock scheme last year.
Southbound flows via the Shanghai-Hong Kong stock connect recorded a ninth week of net purchases while utilisation rates have climbed to more than 20 percent of the daily quota compared with an average of less than 11 percent in January.
Robert Di, a founding partner of hedge fund manager RPower Capital, said the outlook on Hong Kong equities was improving.
"If the Hang Seng can break through the 24,000-point level effectively, then, the bull market is established."
On Friday, the index closed at 24,033.74, not far from where a Reuters poll had predicted the index would be at the end of 2017.
Also encouraging southbound flows is the opportunity to hedge against yuan depreciation, as the local Hong Kong dollar is pegged to the greenback. That, coupled with expectations for improved earnings and cheaper valuations, could keep China funds flowing to Hong Kong.
"The main attraction, of course, is the big valuation gap – Hong Kong stocks are still much cheaper than mainland peers," said a fund manager, who declined to be named, at hedge fund China Dragon Investment.
The Hang Seng index trades at a historical earnings multiple of 13 compared with blue-chip stocks on the mainland at 18 times earnings. The U.S. S&P 500 trades at a ratio of 21.
On 12-month forward price-to-book terms, Hong Kong has a ratio of 1.03 times versus 1.6 for China and 1.46 for the Asia-Pacific, according to I/B/E/S data.
That valuation attraction has boosted the popularity of Hong Kong-focused mutual funds.
First Seafront Fund Management Co has over the past 18 months launched 12 mutual funds that can invest in Hong Kong via the Connect schemes. It has seen rapid inflows into some funds recently and won't rule out the possibility of suspending large-scale subscriptions.
($1 = 6.8577 Chinese yuan)
($1 = 7.7592 Hong Kong dollars)
Editing by Jacqueline Wong