Economy in China on upswing but market plays may be dicey.

DESPITE the hype about China's phenomenal economic growth, Los Angeles investment advisors are telling clients to be wary.

The biggest trouble comes from China's two domestic equities markets, which recorded the worst performance of any global market in 2004. The Shanghai Stock Exchange fell 15.2 percent and the Shenzhen Stock Exchange was off 16.5 percent last year, even as Hong Kong benchmark Hang Seng index rose 13.2 percent.

"The disconnect--good economy, bad markets--is no accident," wrote Donald Straszheim, of Straszheim Global Advisors LLC. "We remain highly skeptical of these markets. Almost every way is a better way of participating in China's growth than buying their equities."

More than 90 percent of all stocks listed on the Shanghai and Shenzhen exchanges are state-owned enterprises, while high-quality Chinese companies typically list on the Hung Kong or New York stock exchanges.

Investment manager Payden & Rygel urges in its Quarterly Review that Chinese officials lift restrictions in the banking sector and liberalize the exchange rate policy to revalue its currency, the yuan. But it cautions that Chinese policy makers may institute new regulations and taxes to avoid scaring U.S. investors, who have already plowed $70 billion in speculative capital into China in the past year.