FUND managers are punting China again as the world’s spotlight turns to the Olympic Games, but investors who have had their fingers burnt this year could be forgiven for feeling sceptical.

Chinese shares have been among the worst performers in 2008, having fallen nearly 50% since December when the Moneysection said it was time to get out.

Longer-term returns have not been as rewarding as China’s economic growth might suggest, either. Over the past 15 years the MSCI China index has returned a mere 6% in US dollar terms, according to the fund manager Aberdeen.

The stock market has performed poorly recently, despite the country’s position as the world’s economic powerhouse, as investors have fretted about higher inflation, slower growth and the impact of a US-led slowdown on Chinese exports.

Economic growth declined to 10.1% in the second quarter, the weakest since the end of 2005 – although that is still above China’s long-run average, according to Capital Economics, a consultancy.

These worries are far more important to investors than the Olympics: a recent report from the investment-data analyst Standard & Poor’s found that Asian fund managers with exposure to China are more concerned about inflation and the global economic slowdown than they are with the games.

Mark Mobius, executive chairman at Templeton Asset Management, said: “Most emerging markets have declined recently as investors have adopted a more cautious approach. Concerns about slowing global economic growth and rising inflation remained at the forefront.”

However, some top investors think the sell-off has been overdone and now could be a good time to buy – if you’re taking a long-term view.

The optimists point to figures showing that stock markets in Olympic host countries have jumped by an average of 28% in the year after the games.

Hugh Young, managing director of Aberdeen Asset Management Asia, said: “Having been concerned about a bubble in the Chinese market and unexcited about valuations for several years, our appetite is starting to be whetted after the recent sharp falls.

“However, we continue to prefer to gain exposure through those Chinese companies listed in Hong Kong, where standards of accounting and transparency are better than those of their mainland counterparts. Our investments in aggregate have strong balance sheets and responsible management teams.”

Shanghai shares have picked up recently with China being one of just a few emerging markets to produce a positive stock-market return in July despite slowing economic growth. Inflation in China is also easing, which is good news for nervous investors because it means there is less chance of interest-rate hikes.

Consumer-price rises eased to 7.1% year-on-year in June from 7.7% in May and a high of 8.7% in February 2008, mainly due to softening food prices.

The country also continues to attract huge amounts of money, with foreign direct investment in the first half of 2008 hitting $52.4 billion (£27 billion), a 45.6% increase on the same period last year. This is more than the $40 billion the government has spent preparing the country for the Olympic Games.

Rebecca O’Keeffe, head of investment at Interactive Investor, said: “Many commentators are still confident in the long-term growth potential of the Chinese market despite its recent performance.

“For investors who are happy to take the risk, investing in China – or emerging markets more generally – may be an astute move.”

The Chinese story has changed in the past decade or so. The country used to be a leading producer of low-value consumer goods, but has since made vast inroads into the higher-end manufacturing more commonly linked with Japan.

In the 10 years to 2007, for example, exports of low-end goods fell by approximately 10% while the value of top-end items being shipped out of China jumped by 25%.

Pinakin Patel, Far East client portfolio manager at JP Morgan Asset Management, said: “China has long been considered the workshop of the world, providing cheap goods at minimal cost. But the reality could not be further from the truth.

“For example, more than 70% of the world’s laptop computers are now manufactured in China, while the country’s auto-motive industry grew more than 90% in 2007 alone.”

China’s investment cheerleaders also point to government moves to improve the ability of Chinese companies to operate on the global stage.

Of the more than 250 state-owned enterprises in business at the moment, the government is planning to identify 20 or 30 that can merge with or take over the others and compete on an international level.

There is no doubt, however, that it will take some careful stockpicking to make money from the Chinese stock market in a downturn.

Philip Ehrmann, who manages Jupiter’s China fund, said: “In the current volatile market climate, we believe it is important to focus on the areas, such as infrastruc-ture and healthcare, where earnings growth remains strong.”

The conditions also make it even more important than usual to pick the right fund. Of the growing number of China schemes available to UK investors, the best performer over five years is the Gartmore China Opportunities Fund, with a return of more than 200%.

Other funds include Fidelity’s China Focus, which has returned 140% in three years, and First State’s Greater China, which has managed to remain flat over the past year – something of an achievement given the stock market’s recent performance.

For investors seeking more general emerging-market exposure, O’Keeffe at Interactive Investor recommends Lazard Emerging Markets, which has returned 212% over five years.

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