China has been having a multi-year bull market run with its index doubling in the last year, with many of its internet stocks as well as industrial and resource stocks seeing a spectacular rise. Warren Buffett, who had invested in PetroChina, recently exited this investment after it rose by a nice 300%, and offered a word of caution to other investors as well. Analysts of the China stock market are on both sides of this argument, with several advising exit, with others asking you to stay invested. Importantly, is this a time to make a new investment?

China's economy for the last decade and a half has been well-documented, with growth rates in double digits. Its stock market(Shanghai stock exchange) has followed suit giving investors strong returns on their investment. However, such sustained growth raises the spectre of past bubbles such as the Japanese stock market of the 1980s and the Internet bubble of mid-1990s in the US market. Many of these markets have not fully recovered even a decade after the bubble bust, and the same fear accompanies the rapid rise of this bull market in China.

Overall economic factors however favor a continued economic boom in China, given the size of its population and the growing consumption amongst the newly prosperous middle-class. The Chinese government, which has embraced capitalism fully, will do everything in its power to maintain stability and it knows that economic growth with easy access to credit is important to sustain this boom. By pegging their currency to the reserve currency of the world, they remain competitive even in the face of a massive drop in the value of the dollar. The economy will face its share of hiccups, but its overall trend is likely to remain in the high single digit to low double digits for a decade or more.

The stock market is a different story. Stocks move up and down based on psychology, perceptions and mood of the participants. Moreover, many stocks in China are relatively illiquid and are majority owned by the government. These issues make the stocks more volatile and are subject to long term downtrends as well. If the government in the meanwhile makes any laws that affect foreign ownership of stocks, you can expect a bear market in stocks. Eventually though, the economy will propel the stock market upward. While the stock market is also a source of capital in China, it is not nearly as large a source as in most developed economies. Owing to this, a bear market in stocks may not necessarily hold back the economy in a huge way, though it will affect the overall sentiments and confidence of the participants.

To participate in the Chinese bull market through mutual funds, select from Fidelity Greater China Fund, Mathews China Fund, Templeton China World and more. And be prepared to hold through ups and downs till the inevitable top formation.