DOES China represent the investment opportunity of the century or is it an economic accident waiting to happen? Either way, the reawakening of this sleeping giant is something investors should ignore at their peril.

On the credit side, even the most economically illiterate will be aware that China is fast becoming the workshop of the world. Its cheap labour and soaring productivity is reducing the cost of everything from toys to televisions.

On the debit side, however, there are growing fears that China’s white-hot economy may boil over, with the collateral damage hitting Japan, the US and Europe.

Yet this has not stopped investors from piling into the Chinese stock markets. Last month, HSBC, the global bank with origins in Hong Kong, closed a second offering of its China Momentum Fund early because of surging demand.

The fund invests directly in stock markets on the Chinese mainland through so-called A shares. These are deemed by many to be more risky than the H shares and “red chips” traded in Hong Kong.

Farley Thomas, of HSBC Asset Management, says: “There are a vast number of stocks and you need to be careful what you invest in. That is why you need very strong people on the ground.”

Despite the enthusiasm of Hong Kong investors, Western fund managers were spooked by government measures to ease demand last year. Patrick Evershed, of New Star, says: “I was about 15 per cent to 16 per cent in China up to 18 months ago. I then cut back after the Government took all sorts of draconian measures in the spring of last year.”

At one stage, his New Star Select Opportunities Fund had only about 5 per cent of its assets in China; the weighting is now back up to 10 per cent.

Mr Evershed says that China’s economy is still racing ahead, but he is nervous that the authorities might revert to controlling growth by diktat, such as limiting lending, rather than raising interest rates.

He moved into more liquid stocks, such as China Telecom and China Life, as a defensive measure. But the main reason he cut his China exposure was to take advantage of a flood of exciting companies floating in London, he says.

Philip Ehrmann, manager of Gartmore’s China Opportunities Fund, has fewer fears over government efforts to control growth. “China as an economy is going to grow almost relentlessly. China as a stock market has been, and is, more of a challenge.”

He says that there are clear margin pressures in some sectors where there has been a big build-up of capacity and huge rises in commodity costs. So he has targeted consumer stocks. Chinese people are becoming richer as a result of economic growth that has averaged 9 per cent a year after inflation for several years.

Beneficiaries include Gome Electrical, the “Dixons of China”, and food retail chains, such as Wumart, in Beijing, and Lianhua, in Shanghai.

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