Moreover, he emphasizes that it takes active management to accurately capture the Chinese market, which is fractured into mainland share classes, Hong Kong shares and foreign-based shares (for example, ADRs). This trifurcated offering keeps indices from capturing the true dimensions of China's market capitalization by focusing only on the limited free float.

He also contends that the Chinese government's currency policy of fixing the yuan to the U.S. dollar has kept its currency artificially cheap, distorting the valuation of ordinary shares. What investors must do, he says, is start with China's GDP (as a way to initially weight the country) then adjust that percent upwards by factoring in the country's artificially weak currency to more accurately capture the country's value in the global economy. When taking these factors into account, he finds that the proper Chinese equity exposure in a global portfolio is between 6% and 12%. And yet the country currently represents only 2.25% of the MSCI All Country World Index.

Performance And Risks
Malkiel squares his actively managed products with his long-term embrace of passive investing by again citing the inherent inefficiencies in the way the Chinese market functions and is tracked. Profiting from the mainland's vitality, Malkiel says, means capturing Chinese growth from the safety of more evolved and transparent offshore markets. It also means focusing on cheaper, faster growing companies and exploiting the high volatility of Chinese stocks.

Like China itself, the AlphaShares' funds initial two-year results have been volatile. The Real Estate ETF lost 57% in 2008, but then soared 81% in 2009. The Small-Cap ETF  appreciated 55.6% in 2008 and then doubled in 2009. The All-Cap ETF came to market last November and is off 6% in its first three months of trading.

Last year, Malkiel's China-linked fund, which started in late 2007, soared by 51.47% after collapsing by 47.15% in 2008. The Buy-Write strategy started in April 2009, ending the year up by more than 39%. The Enhanced China Fund was off 8.65% during its first month of trading in January 2010.

Counterpoint
Not everyone is so certain about China, and some are downright bearish-none more so than James S. Chanos, manager of the hedge fund Kynikos Associates, who has made some incredibly prescient short calls in the past, including those on Enron and Tyco International.

Chanos is troubled by the Chinese government's hyper-stimulation of its economy (through its implementation of one of the world's most aggressive stimulus packages). He's worried that China has created excess goods and services that may find no buyers.  He's concerned by the soaring credit and rising amount of bad loans in the country. Furthermore, he believes deep government reserves can perpetuate dangerous economic imbalances, and he likens China's real estate bubble to Dubai on steroids.

Bubbles are created when asset prices continuously inflate without correcting. And according to Tony James, president of the alternative asset manager Blackstone, Chinese corporate securities are on such a trajectory. He now thinks that India offers "some very attractive growth [opportunities] similar to China, but with not nearly as high of multiples."

David Shambaugh, the director of the China policy program at George Washington University, sees Chinese economic policy as schizophrenic. One moment, the country is opening markets and enforcing more transparent behavior, but in the next it is cracking down at home and lashing out abroad. Political reforms have also stalled.

Shambaugh, also a senior Fulbright visiting research scholar at the China Academy of Social Sciences Institute of World Economics & Politics in Beijing, sees in China "a deteriorating foreign business climate, with multinationals complaining of a host of new operating constraints and protectionist measures."