Since its all time high of 31,638 points on October 30, 2007, Hong Kong's benchmark Hang Seng Index has fallen by around 25%. What started off as a healthy correction that was well expected by investors has now turned into an irrational sell-off, says Richard Wong, investment director for China equities at Halbis, a fund management arm of HSBC in Hong Kong.

WongÆs HSBC China Dragon Fund currently has a 60% allocation to H-shares and red-chips, another 40% in the mainlandÆs A-shares with negligible interest in foreign-currency denominated B-shares.

For 2008, Wong forecasts H-shares in Hong Kong will trade at a price-to-earnings ratio of 13.8 time forecast earnings, red-chips at 16.5 times, ShanghaiÆs A-shares at 21.6 times, and Shenzhen's A-shares at 26.2 times.

ôIf you analyse the stockmarkets,ö Wong comments, ôHong KongÆs H-shares and red-chips are actually trading at a discount now.ö

He projects a 30% growth in Hong Kong-listed Chinese shares this year.

Wong says ChinaÆs growth story is far from over, even in face of a global recession. Domestic consumption and internal investments will be the key driver for its on-going development, he says.

Wong expects China's GDP growth to hover at over 10%, from 11.6% last year. With a 5-10% revaluation of the renminbi this year, he also forecasts inflation pressure to ease from the second half of 2008 at no more than 5%.

He expects Chinese businesses to be supported by two key developments in 2008 -- the ongoing corporate tax reform which promises to slash corporate income tax from a previous 33% to 28% this year and mergers and acquisitions among Chinese corporates. The Chinese corporatesÆ low debt ratio and increasing economies of scale will promise to beat out the governmentÆs credit tightening threat, while recovering cost pressures posted by ChinaÆs new labour regulation, currency appreciation and rising international commodities prices.

Meanwhile, China has recently witnessed the worst snowstorm it has seen in 50 years. The heavy snowfall has cut off railway transport, leaving thousands of Chinese stranded as the traditional Chinese New Year approaches. Punters say the delay in transport has reduced supply of food and coal to inner cities, driving up the already high inflation and potential for social unrest in inner provinces.

However, Wong dismisses the long-term effects of the catastrophe. ôThe impact of the recent snowstorm will be short-lived,ö he says.

Instead, he sees it as a stimulus for the central government to speed up infrastructure projects, particularly the previously under-invested railway network for inner provinces. Fixed asset investments such as the opening of the Dalian-Shenyang route and a new Beijing-Shanghai bullet train will promise a boon for commodities and infrastructure-related stocks.

Wong cautions investors not to dismiss the purchasing power of mainland citizens. In the past three years, inner province residents have seen a leap in income per capita from $700 to $1,500 per head. This rising middle class income could also mean a boon for consumer sectors, where their distribution networks are no longer limited to the ærichÆ coastal provinces, but also in previously desolate locations such as Xinjiang, Qinghai, Helongjiang and Jilin. Retail sales grew by 16.8% in 2007 versus 13.6% in 2006.

For this year, buoyed by the rising income among the Chinese workforce, Wong predicts retail sales growth will maintain pace at no less than 17% compared to last year.

This year, he favours consumer and infrastructure-related stocks; while machinery and commodities are also key focuses. He is neutral in airline and banking stocks and underweight in Chinese property developers.