HONG KONG -- Size matters, at least when you're trying to sell mutual funds that invest in Asia.

Big populations and high economic growth rates are supposed to be bullish arguments for investing in the world's most populous region. But if you think stock selection is anything less than critical here, you'll be disappointed.

As the U.S. House of Representatives gets set on Wednesday to vote on conferring permanent normal trade relations (PNTR) on China, those bullish arguments will probably get trotted out again. And for U.S. businesses, drooling to sell to the country's 1.2 billion people and embrace its steady 7% economic growth, PNTR may well be a boon.

But how does China's size affect the ordinary investor? For people who buy stocks, China's headline growth figure hasn't translated into major portfolio gains. According to the

Hong Kong Investment Funds Association

, a collection of most of the major mutual-fund groups operating here, China equity funds have declined an average of 24.7% over the past three years, vs. a loss of all emerging-markets funds of less than 9%. Over the same period, funds investing in the high-population Indian subcontinent returned 94%. One reason for China's poor stock returns is that the country's best companies are not the ones that get to be listed: Instead, a lot of dud state-owned firms get the nod as the government tries to unload bad assets on the investing public. Even when good firms get listed, China's macroeconomic troubles are considerable.

GDP

in China may be rising, but deflationary pressures -- which compress margins -- continue to plague the country. Retail prices fell 2.4% in April from the same month a year before as more workers got laid off. As nice as it would be to invest based on economic growth, a fund's underlying assets are shares in companies, not countries. Population and GDP have only an attenuated impact on the attractiveness of either a company or a region.

After all, what is GDP? Nothing more than a measure of past output, aggregating all kinds of industries. In China, state-owned companies produce mountains of goods no one wants to buy, incurring huge losses in order to keep workers employed and housed. It's massively inefficient, but it gets reflected in great production numbers.

Still, size and growth are easy ways to sell Asia. Take the

(MSCAX) - Get Report

Van Kampen Asia Fund, which consistently underperforms its peers investing in Asia (excluding Japan), with a return in the 38th percentile among Asia ex-Japan funds over three years, and in the 10th percentile over five years, according to

Dow Jones Interactive's

fund ratings. The fund claims to approach stocks from a "bottom-up" approach, looking at the fundamentals of a company before the macroeconomic environment.

Maybe, but that's not how the sales pitch runs.

"Asia's growing population represents new consumers and a larger work force, factors that may help to support future economic growth," says the promotional material on Van Kampen's Web site. More alarmingly, in the fund's annual report, the co-manager of the fund calls the outlook for Asian stocks "positive primarily because of the ongoing economic recovery in the region."

The fund's co-manager,

Morgan Stanley Dean Witter Investment Management's

Ashutosh Sinha, declined to elaborate on the impact of economic growth on earnings.

Another proponent of growth-begets-earnings is the

AIM

family of funds: A company news release this year quoted Barret Sides, co-manager of the

(ASIBX)

Asian Growth Fund, as saying the Asian economy was "in the early stages of a growth cycle, and many companies have the potential for accelerated earnings growth over the next several years." Sides appears to run a good fund, but his track record isn't even three years old. AIM's older Pacific ex-Japan offering gets less hype, and with good reason: The

(GTPAX)

New Pacific Growth Fund was last in its category over five years with a return of negative 7%. Over three years, it was also close to the bottom of its category.

China provides perhaps the clearest example of why GDP can be a misleading macroeconomic data point. The

Economist Intelligence Unit

says China can continue its current eye-popping growth rate, forecasting an expansion of 8.3% per year from 2005 to 2009. The problem: The forecast depends on reform of the state-owned sector. "Without reforms, scarce resources will continue to flow to inefficient, loss-making state-owned enterprises and state-owned banks, which are weighed down by non-performing loans," EIU said.

Of course, bad investment in Asia is hardly restricted to China. In the four years to the end of 1996, GDP growth in Thailand averaged 8.2% a year. But when foreigners would no longer finance a huge current account deficit, a lot of that growth was exposed for what it was: empty apartment buildings and a surfeit of golf courses, built with money the banks should never have been lending. The economy then shrank by 1.7% in 1997, and by 10% the following year. How much a place grows is important, but equally relevant is but how

well

it grows. Thai funds averaged a loss of 65% over the past five years, as investors woke up to how rotten some of the growth they were buying into before the crisis had actually been.

Today, it could be that Asian investors are learning that GDP growth is a piece of history, and often a distorted one at that. Last Friday, Singapore reported that first-quarter GDP rose 9.1% year on year, far faster than most economists had been predicting. The market fell sharply anyway, with decliners vastly outnumbering gainers. It turns out that, as in the rest of Asia, investors were much more concerned with the outlook for U.S. interest rates and how these might affect Asia's export markets.