China funds finally got a break.

After spending much of the year in the red, thanks to the

Nasdaq

selloff, mutual funds specializing in China rose modestly last week on news that the European Union would support the country's bid for membership in the

World Trade Organization

.

Today, the U.S.

House of Representatives

votes on granting China permanent normal trade relations, and supporters believe they have the votes. Final passage of the bill would guarantee Chinese goods imported into the U.S. the same low tariffs as products from most other nations.

"China's upcoming WTO entry would definitely boost exports and foreign direct investment,'' says Adrian Fu, portfolio manager of the

(GFMCX)

Guinness Flight Mainland China fund. "More importantly, we believe that China's entry to the WTO will accelerate important changes to its economic structure over the next few years.''

The 13 China funds tracked by

Lipper

had an average gain of 2.2% last week. But that's not enough to erase their negative 2.4% average return for the year -- the result of their heavy stakes in the slumping technology sector.

And, in any case, the uptick may be short-lived. Though China's new trade partners are likely to give the Asian giant an economic lift, the full benefit probably won't be felt for another three to five years, say money managers who specialize in the region. Macroeconomic trends can take years to play out, and typical retail investors may not have the patience to reap the benefits.

Investors with the patience to capitalize on positive trends in China may be better off doing it through a broader Pacific Rim fund, such as

(MAPTX) - Get Report

Matthews Pacific Tiger, says Scott Wells, a financial adviser with

Evensky, Brown & Katz

of Coral Gables, Fla. The Matthews fund spreads its assets among nine countries, but had 52% of its assets in China as of March 31, according to

Morningstar

.

In the shorter term, additional trade for China is already producing some beneficiaries among companies involved in the direct handling of goods that make their way between China and its new trade partners in the U.S. and Europe.

Xiaoxu (Jerry) Lu, portfolio manager of the $24 million

(USCOX) - Get Report

U.S. Global China Regional Opportunities fund, likes air carriers

China Southern Airlines

and

China Eastern Airlines

(CEA) - Get Report

, which will ferry the goods to and from Europe and the U.S.

China Merchant

and

Cosco

, two container-leasing and port operators, have already benefited from increased trade as a result of China opening its doors to new investors, says Lu.

Richard Gao, one of the managers on the $7 million

Matthews Dragon Century China

fund, also has been loading up on China Merchant and Cosco as well as

Zhejiang Expressway

, a highway developer.

"We've been optimistic about the WTO for quite some time,'' says Gao.

But not all industries are well suited for the increased competition. As part of the deal reached with the European Union, China has agreed to allow at least 25% foreign investment in Chinese mobile-phone companies immediately upon entry into the WTO, then 35% after one year, and 45% after three years.

That could be potentially damaging to companies like

China Telecom

(CHL) - Get Report

, a large holding in several of the China funds. That company has relied on its monopoly position to drive growth without much emphasis on customer service, says U.S. Global's Lu. "I believe the stock will do well for a couple of years from now, but then it will face competition if they don't change their attitude soon after the WTO.''

Another industry that may wilt from the competition is financial services, mainly banking and insurance. "Chinese banks are not ready for direct competition with foreign banks,'' says Matthews' Gao.

He and others say it could be an opportunity for China to clean up those bungling industries, by looking to stamp out its huge level of nonperforming loans, which Gao estimates to be between 15% and 20% at some banks.

Still, China's sheer size -- and its population of 1.2 billion people -- will create opportunities for greater business growth, even in the face of greater competition. Guinness' Fu estimates the penetration rate of personal computers and phone subscribers has increased more than 30% the last two years.

Fu sees a bright future for other telecommunications concerns. "China's technology and telecom markets are the most lucrative in Asia as they are in the early stage of development, and the affordability of services for consumers is improving as the economy of China is turning around,'' he says.

Some of the biggest potential gainers from the new trade pacts may not be based in China at all, but on an island to the south, Hong Kong. Even though Hong Kong rejoined China in 1997 after nearly a century of British rule, the island is considered a foreign investor. As China opens up its market, Hong Kong companies have a linguistic and cultural advantage over their European or American rivals.

Among the beneficiaries might be Hong Kong bank stocks

HSBC Holdings

(HBC)

and

Hutchison Whampoa

.