CHINA, one of the most hotly tipped markets of recent times, has been prompting comparisons with the dotcom bubble after soaring 50% this year, only to drop 4% last week when the government sought to calm the frenzy.

Millions of Chinese investors have been ploughing their savings into the market in the hope of better returns, with almost 30m share trading accounts opened this year alone – four times the total for the whole of 2006.

The recent flotation of Belle International Holdings, China’s largest retailer of women’s shoes, was more than 500 times oversubscribed by private investors. This is reminiscent of the frenzied flotation of Lastminute.com in March 2000, at the absolute peak of the tech boom, which was 40 times oversubscribed. The shares soared nearly 50% after issue, before plunging back.

There are even concerns that speculators have been borrowing against the value of their homes to invest in the stock market.

Tony Dolphin of Henderson, a fund manager, said: “The Shanghai A index is up 155% in the past nine months and has soared through 2,000, 3,000 and 4,000 with hardly a pause – in a manner reminiscent of the Nasdaq index in 1999 and 2000.”

Alan Greenspan, the former American central banker who warned of “irrational exuberance” during the tech boom – admittedly three years before it burst – said he feared a “massive contraction” in Chinese stocks.

Last Wednesday, the government took steps to calm the frenzy when it trebled the stamp duty on share trading from 0.1% to 0.3%, which hit Shanghai shares and spread through the rest of Asia. Western markets escaped unscathed, however, unlike in February when a 9% fall in Shanghai knocked shares around the world.

Most analysts say that a further sell-off in China should not hit the rest of the world too hard, at least in the longer term, because it is still such a small part of world markets, and because its Asian neighbours are much stronger than they were in the last regional crisis in the late 1990s.

Kevin Gardiner, head of global strategy at HSBC’s investment-banking arm, said: “The A-share market [the Shanghai market used by domestic investors] is largely insulated from global indexes, and still relatively small at just 2.5% of global markets.

“As we saw in late February, a material setback in Shanghai could doubtless trigger some contagion in the rest of the world, at least in the short term. Looking further ahead, however, we think that the global indexes can shrug off localised setbacks in some emerging markets because we suspect that there is potential for growth surprises from the rest of the world, including America.”

Hugh Young of Aberdeen Asset Management also believes any collapse would only have a very local impact. He said: “China’s stock market is a domestic bubble with little foreign participation. The apocalyptic view is that the bubble will burst and cause an economic slowdown that would then hit the rest of the world. But I think it is a classic speculative bubble that will end in tears but will largely affect domestic share traders. The global impact will be limited.”

A setback in China could even bring some buying opportunities in other shares. While Shanghai markets look overvalued at 48 times earnings, Chinese firms listed in Hong Kong, known as H shares, are at just 19 times earnings, according to HSBC Investments.

There may even be opportunities closer to home, in London’s Alternative Investment Market, where scores of Chinese companies have listed in recent years. Some are trading at price/earnings ratios of just 10, according to Patrick Evershed of New Star Asset Management. He said: “If the Chinese market tumbles, so will these stocks but companies that are growing strongly and are on a low p/e shouldn’t be as badly affected as most.”

We asked the experts to recommend Chinese shares you could invest in closer to home.

China Shoto

The firm makes most of its profits selling batteries for mobile phones. China Mobile, the country’s largest telecoms provider, is one of its biggest customers. Mobile-phone use is getting a big boost because 3G technology is being introduced for the Beijing Olympics next year. The shares cost 176½p on Friday.

Evershed said: “Another big growth area for the business is batteries attached to bicycles, driven by the need for cheap transportation. Production of these bike batteries has gone up by 50% over the past two years to meet the strong demand.”

Griffin Mining

This is not strictly a Chinese company – it is domiciled in Bermuda and its main office is in London. However, it makes most of its profits from mining and processing zinc, which is used to galvanise steel, at a mine 124 miles from Beijing. Its shares cost 112½p.

Evershed said: “Griffin has been growing rapidly. Its turnover in 2005 was $6m (£3m), last year it went up to $43m and in the current year it is expected to rise to $63m. The company has $40m of cash on the balance sheet so it’s a good long-term growth stock.”

Renesola

Merrill Lynch, the investment bank, thinks shares in this Chinese solar-panel maker could soar from 539p to 800p over the next year.

However, Giles Hargreave of Marlborough Fund Managers issues a note of caution. He said: “Renesola’s shares were cheap when it came to the market but as investors have recognised their value they have shot up. I have taken some profits after such a successful run but I still think it has some way to go.”

Prosperity Minerals

China has become the world’s largest cement producer with an output of 1 billion tonnes a year. Domestic demand is expected to reach 1.2 billion tonnes by 2010. Cement is expensive to move around so it needs to be made by local firms such as Prosperity, one of Hargreave’s favourite stocks at 153½p.

Haike Chemicals

This company refines crude oil into gasoline and diesel in China and its business has boomed as the economy expands. At present it is forced to sell its oil at artificially low prices set by the government, but these controls are expected to be lifted later this year. The shares currently cost 194p.

Standard Chartered

It was rumoured recently that China’s new state investment fund could take a stake in the emerging-markets bank, lifting its shares. They currently cost £17.27.

Charles Deptford at Baring Asset Management would not be surprised if a takeover bid materialises. He said: “This would be a strategic investment for the Chinese government as it would boost its global financial profile. It would also give it direct exposure to other parts of Asia’s financial markets.”

Even if it is not taken over, it is still a good bet on Chinese growth because two-thirds of its profits come from the region.

Funds

Most of the funds available to UK investors steer clear of Shanghai’s A shares and invest instead in Hong Kong, or other countries such as Korea and Taiwan that have benefited from the China bandwagon. Justin Modray of Bestinvest, an adviser, recommends funds such as Aberdeen Global China Opportunites and First State Global China.

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