Is China fever giving way to China fatigue? Earlier this year, investors couldn't seem to get enough of Chinese stocks. Initial public offerings were oversubscribed hundred of times and prices of many new listed stocks jumped 50% within the first few days of trading.

But newly listed Chinese companies, hurt by nagging concerns about poor disclosure and questionable balance sheets, haven't fared as well in recent weeks. Some, such as Semiconductor Manufacturing International Corp. (SMI ), mobile content producer Linktone (LTON ), and mobile Internet provider TOM Online (TOMO ), are trading well below their IPO prices. Shares of mainland insurance giant China Life Insurance Company Ltd. (LFC ), the world's biggest public offering last year, are 30% off their early January high. "This response is not particularly encouraging," says Julian Lau, portfolio strategist of Fidelity Investments Management Ltd.

Clearly, the euphoria that once greeted Chinese stocks traded on exchanges in Hong Kong and New York has cooled off considerably. Mainland China companies are increasingly being measured by time-tested yardsticks such as price-earnings ratio, profit growth, the strength of management and balance sheets, and the transparency of their bookkeeping procedures. Using these criteria to winnow the field, stock pros say many of the most compelling Chinese stocks are in low-tech sectors such as commodities, energy, and basic consumer goods. This year "is the time to be buying into the right company, as opposed to buying into the China story," says Adrian Mowat, regional equity strategist at J.P. Morgan Securities (JPM ).

Despite the recent bout of second-guessing about IPOs, economists say the overall economic picture for China remains bright. Growth, though slowing slightly, is nevertheless expected to top 9% this year. Foreign direct investment is still flooding into China after hitting $53.5 billion last year. And the country is sitting on more than $460 billion of foreign-reserve earnings from exports. Plus, it's widely believed the Chinese currency is undervalued and may be adjusted upward later this year. That would give an extra boost to China Inc.'s earnings in dollar terms and inflate the dollar value of Chinese equities. As a result, some fund managers see the stock market correction as a buying opportunity. "People will be more skeptical going forward, and that's always a good thing, because investors will drive harder bargains and you can get stocks at a good price," says James Squire, portfolio manager at Baring Asset Management in Hong Kong.

Bargain hunters are bulking up on Chinese resource-related holdings, thanks to soaring prices for global commodities such as oil -- much of that due to surging demand from China. Squire, for one, likes mainland refiner Sinopec Shanghai Petrochemical Co. (SHI ), China's largest plastics and industrial resins maker. It's poised to benefit from higher margins as demand begins to outstrip supply in Asia. He also sees value in China National Offshore Oil Corp., which has a virtual monopoly on the country's offshore exploration. CNOOC also does double duty as a defensive play, with a healthy 3.5% dividend yield and reasonable p-e of 14 times projected 2004 earnings.

In the same vein, Yoon Lai Choo, manager of Comgest Growth Greater China Fund, recommends energy companies with predictable earnings. That includes China Oil Field Services Ltd., which is well placed to capitalize on demand for its offshore oil-exploration-related services by CNOOC. Yoon is also keen on Beijing Datang Power Generation Co., which supplies electricity to fuel-hungry Beijing and surrounding cities. It's expected to benefit from higher rates and a 30% increase in capacity coming on line this year.

Yet as enticing as commodity-related and energy shares in China may be, investors would be wise to spread their bets. Martin Lau, director of greater China equities at First State Investments, thinks oil and mining stocks like Aluminum Corporation of China Ltd. (ACH ), whose American depositary receipts on the New York Stock Exchange, have more than tripled in price in the past 12 months, are overpriced. He prefers shares of companies that will ride the wave of consumer spending. "Consumption is going to be the next driver for growth," Lau says. One of his favorites: Tong Ren Tang Technologies Co., a leading maker of traditional Chinese medicines, which has averaged 20% annual profit growth since it listed in Hong Kong in 1999. J.P. Morgan's Mowat suggests picking up shares in Brilliance China Automotive Holdings Ltd., which became the first mainland company to list in New York back in 1992 and has a joint venture in China with BMW. Its chief attraction is a 2004 projected p-e of just 9.3.

Of course, worthy as these stocks may be, investors shouldn't ignore the warning behind the deflated interest in new Chinese listings. And even if shares of China Inc. bounce back sharply, investors would be wise to focus on steady growth stories -- and keep their rose-tinted shades in their pockets.

By Frederik Balfour in Hong Kong

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