Not long ago China was the worldÆs worst performing stockmarket. Then in 2006 and 2007, it rose to become the best. Now, in 2008, it is down 47%.

"If the US fell by 47% people would be jumping out of windows," says Aaron Boesky, CEO of A-share specialist Marco Polo Pure Asset Management, who says his fund is only down 9% thanks to weighting 60% to cash.

What lies in store for China? Price-to-earnings ratios were 72x at the market peak, and now forward price earnings are 17x, representing a 30%-40% P/E ratio discount to the Nasdaq.

First-half 2007 inflation in China was 3.2%, rising in the second half to 6.9%. Some funds predict a peak in cyclical inflation in the middle of this year as ChinaÆs economy adjusts. It is also seen as a symbol of the greater degree of industrialisation in the economy.

ôThereÆs more demand in the world as it retools," says Boesky, whose firm projects 30% Chinese corporate earnings growth in 2008 and a possible bottom to the market at 3300 points. "IÆm not worried about a healthy level of inflation coupled with this kind of economic activity, because itÆs a far preferable scenario to deflation."

The panel at the GAIM conference in Hong Kong agreed that finding companies in China with 50% earnings growth prospects was a lot harder this year than before, though they were still searching.

ôWhere is the alpha?" speculated Ted Chen the director of Greenwoods Asset Management, which manages $600 million and is currently focusing on H-shares. öWe have 16 people in Shanghai kicking tyres. That represents hard work and is what we have to do to find the Chinese equivalents of Google and E-Bay - companies that still do well and improve margins even in a difficult market."

So has China reached the same plateau as Japan did 19 years ago? At that time Japan had already peaked economically, and as a post-industrialised nation, found it had nowhere to go next. So, that leads China hedge fund managers to remain optimistic, as China is still very much an emerging country, ostensibly far from its potential zenith.

ôChinaÆs housing bubble has not been financed with so much leverage as elsewhere,ö says Yvonne Sin of Ginger Capital, a $350 million equity long/short Greater China hedge fund. ôAs an emerging market with maybe 400 million people entering the middle class in the next 10 years, that gives the country an enormous amount of impetus up the development curve. When the sun and the moon line up, China still offers the greatest opportunities in the Asian economies."

Chinese money supply is mushrooming as the banknote printing presses goes into overdrive. There is the consolation that currency appreciation will help mitigate inflation, though managers donÆt expect substantive re-pegging.

ôI see wage inflation will be mitigated by increased productivity,ö says Boesky. ôCompanies are working more efficiently than they used to five years ago, and as an investor I can pay more for that. If I had to name a concern about one thing, it would be price controls: if those were introduced, then I would be worried.ö

There are still comparatively few domestic buying options for local funds and so at some point they will come back to the market. When they do, and overseas investors feel the timing is right, there will still be China-themed hedge funds ready to meet them.