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Cheap China Stocks That Defy Downturns

NEW YORK ( TheStreet) -- With growth in China slowing, the country's stocks have been pummeled. For the year so far, China region mutual funds have dropped 22.0%, lagging the S&P 500 by more than 20 percentage points and ranking as the worst performing category tracked by Morningstar.

Now some portfolio managers argue that the stocks have gotten cheap. Steve Cao, portfolio manager of Invesco Asia Pacific Growth (ASIAX), says that he was underweight China in 2010. But lately he has been scooping up bargains. "Since the correction, things have become attractive," he says.

The markets are pricing stocks as if China may be on the verge of a big downturn, says Jasmine Huang, portfolio manager of Columbia Greater China Fund (NGCAX). She says that at the trough of the markets in 2008, Chinese stocks traded at 7.3 times forward earnings. Now the multiple is 8 times earnings.

Financial and property stocks trade at a discount to their prices of 2008. Huang argues that the concerns about China are overdone.

Huang concedes that the economy is slowing. After hitting an annual growth rate of 11.9% in the first quarter of 2010, the Chinese GDP expanded 9.7% in the first quarter of 2011 and 9.5% in the second quarter. Analysts say the current rate is around 9.0%.

While the trend has been down, Huang says that the slowdown has been stage-managed by the government. During the financial crisis, the country spent more than $500 billion on economic stimulus. The medicine worked, and the economy grew. Now the government is unwinding the stimulus.

To prevent the economy from overheating, the central bank has raised interest rates. The authorities required banks to hold more reserves, a step that reduces lending activity. All the moves are slowing growth. But if the drop becomes too steep, the government will again begin stimulating demand, says Huang.

"The government will do what it takes to avoid a hard landing," she says.

To own a China fund that does relatively well in downturns, consider Columbia Greater China. The fund has outdone its peers by 3 percentage points this year. During the past five years, Columbia returned 7.8% annually, surpassing 54% of its competitors.

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