Views on the likely direction of China equities in the second half of 2011 are deeply divided. One thing that most investors agree on is that the MSCI China Index valuation looks cheap historically. The Index's one-year forward PER (based on the IBES-consensus EPS forecasts) stands at 10.5x, below its 12.7x term average since 2003, and close to the bottom end of the 10-15x range in which the market traded since 2003. Valuations also look attractive relative to equity markets globally.

However, opinions diverge on whether this is a buying opportunity, or whether apparently cheap valuations signal trouble ahead, meaning prudent investors should hold back. The key questions in investors' minds right now are:

How significantly is the China economy slowing? If we see a 'hard landing' in 2H11, could we see downward revisions to earnings forecasts?

Will we face the toxic combination of sharply lower GDP growth and stubbornly high inflation by the end of this year?

What are the potential shocks out there? Local-government debt problems (and rising bank NPLs), SME bankruptcies, financial distress among property developers?

The big question is: how much of all this is already 'in the market'? Based on experience since 2003, have share prices reflected the uncertainties mentioned above? We focus here primarily on the last question. We look at the relationship between GDP growth and corporate earnings, between earnings and equity valuations, and at the liquidity environment, to assess the risk-reward picture. We conclude:

David Fuller's view The rise and rise of China is fascinating, at least for this commentator. It is also somewhat alarming, at least for some people.

Questions investors may wish to consider: Do you want to be invested in the world's second largest economy, widely forecast to become the largest within two to three decades? If your answer is no, move on to another topic. However if you say yes, when in terms of timing?

I certainly do want to be invested in China for the long term. The biggest of my two main investments in that country is via the Atlantis China Healthcare Fund (ID). Its costs are high but I put up with that because the manager, Yang Liu, was born in China and knows what she is doing in navigating the country's politically driven currents.

My next largest position in China is via the JPMorgan Chinese Investment Trust (JMC LN), which also includes Taiwan. Coincidentally, its two managers Howard Wang and Emerson Yip both went to Yale University but are now based in Hong Kong. I like investment trusts (closed-end funds) which were launched before the turn of the century (JMC in 1993) because they have competitive fees.

Both funds remain in corrective phases. I do not think this will change significantly until investors are able to look beyond China's current monetary tightening. That will depend on inflationary pressures, not least from commodities. Meanwhile, I am in general agreement with Colin Bradbury's comments regarding valuations, found in the opening summary of Daiwa's report.

Many other China funds are listed in the Chart Library.