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China, the emerging market of the moment, is an easier play than most investors realize, but it probably isn't where you should go looking for quick profits.

With Chinese ADRs hitting U.S. equity markets to much fanfare and growing hopes that the dollar-pegged renminbi will soon become convertible -- at a 7.8% estimated annual growth rate -- investors of all types think the East isn't quite so red but might well be green.

Hedge fund managers focused on "greater China," which comprises mainland China, Hong Kong and Taiwan, recommend a balanced mix of optimism, patience and caution for a market where many investors have ventured with high hopes and later been burned. Political risk has declined, but is still an issue, and much of the investment momentum is predicated on possibly unsustainable annual growth rates of 7% or more. With an equity market still split into domestic and foreign-owned share classes, securities regulations are becoming easier to navigate, and so after a lull of several years, China is back.

"I can't think of a single investment or investment strategy that is not currently being affected by one's views of what is going on in mainland China," says John Trammell, president of Investor Select Advisors, a fund of hedge funds in New York.

He sees opportunity in China as a matter of scale, because its high economic growth rates have driven up demand for commodities and consumer goods alike.

Major names among China ADRs include recently offered

China Life

(LFC) - Get China Life Insurance Co. Ltd. Report

, cell-phone powerhouse

China Unicom

(CHU) - Get China Unicom (Hong Kong) Ltd. Report

, oil producer


(SNP) - Get China Petroleum & Chemical Corp. Report


Huaneng Power

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(HNP) - Get Huaneng Power International Inc. Report

, two companies expected to grow with the country's infrastructure needs.

Trammell says that Chinese companies will grow, and so will U.S. companies that do business there.

He said a recent Lehman Brothers analyst's report on


( COMS) attributed 2004 growth to a boom in Asian orders. "Even 3Com can be included in the China story -- there are all kinds of ways to invest in it," Trammell says.

But he says that progress toward truly mature markets will be slow -- just as the Chinese government wants it. China is only now seeing the rise of privately founded companies listing on its exchanges, a gradual expansion from formerly state-owned businesses that often had shaky fundamentals or other problems that weren't reflected in their share prices.

Those shaky fundamentals are sometimes still an issue, says Kai-shing Tao, chief investment officer of Pacific Star Partners, a New York equity hedge fund that will start trading early next year.

"You have to move beyond the two-page summary that major research houses put out," he says of picking specific China names. "People who talk about greater China all see the same potential -- it's not a secret -- but not everything is as bullish as everyone says."

Bill Valentine, who invests in Chinese ADRs through his Valentine Ventures asset management firm, says some names are vital investments, and some are trouble.

He calls the China Life IPO "scary."

"It harkens back to the tech bubble," the Bend, Ore., money manager says. "The mistake many people will make is that this current spike in demand is guaranteed to last. Investing in China gets faddish, and you're getting this huge run-up.

"But you can't make a global diversified long-term growth play without owning China -- that doesn't change."

The toughest part of a China portfolio is not following the herd, says Marcey Berges, chief financial officer of the Jayhawk China Fund, which is based in the suburbs of Kansas City but has offices in China and Hong Kong.

The fund looks for value plays, particularly among H shares of Chinese companies listed in Hong Kong. Those tend to trade at lower multiples than A shares, which are only open to domestic investors and large foreign institutions that obtain a joint venture agreement with a Chinese partner.

"You really need to visit companies and look at financials if you are a stock-picker," she says. "But you have a country that's been off everybody's radar screen for the last few years. You have tremendous opportunity for growth."

Both Trammel and Tao say the sustainability of that growth is the key to a China strategy.

"I can almost guarantee you that in this span of economic growth, there's nothing new that China has discovered," Trammel says. He says the political leadership will eventually have to slow growth, and do so with a system that has different rules for its currency valuation, central bank administration and domestic policy.

"There's no gentle way to do that. They're going to run the risk of keeping the economy stoked up and hope growth outruns the inevitable fall," he said.

Tao says this element of risk means a China play should get no more than 5% of an investor's capital.

"You have to be comfortable with volatility," he says. "I think greater China has the rewards to justify the risk you take on, but nobody is playing this as a place where you want to put your children's college tuition."