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For sheer entertainment value, it’s hard to beat a mutual fund investing in Chinese companies. The last time I wrote about the subject, it was after reading “From Wall Street to the Great Wall” by Burton Malkiel of ‘Random Walk Down Wall Street” fame. This time, I couldn’t resist the new book by Henry Paulson entitled “Dealing With China.” You remember “Hank,” our former Treasury Secretary. He and Representative Nancy Pelosi constituted the tag team that saved us from plunging into a barter economy --- succeeding within just twenty-four hours before ATM machines shut down across the country.

But I digress. China’s stock market is finally coming back after about eight years of lackluster performance. Most of the mutual funds identifying as “China funds” have enjoyed gains of 35 percent or so over the past twelve months. The first time I wrote about them was in October of 2007 after they had gained a quick 70 percent. A few months later, they had lost about 70 percent creating a dream opportunity for dollar cost averaging.

Today, they have clawed their way back to respectability with what amount to ten-year average annual returns of about 14 percent --- one of the highest returns of any single fund type. The China funds tend to invest in large, established companies, but the action, these days, is in smaller companies. These stocks, combined with more long-term substantial companies, have caused the total Chinese market to rise by 147 percent.

The concern, of course, is that irrational exuberance will infect the Chinese market just as that phenomenon has been known to happen here. The PE ratio (price of stock divided by annual earnings) of small company and tech stocks in China is about 143. The PE ratio of large established Chinese companies, by comparison, is only about 25 and that’s not far beyond our own level of about 20 --- depending on whose numbers you use.

Mr. Paulson, who has traveled to China over 100 times, is on a first-name basis with many Chinese leaders. It all began with his days as the CEO of Goldman Sachs when that firm was one of the first investment banks to successfully accomplish any investment success in the country. Later, as Secretary of the Treasury during one of the most turbulent economic times in American history, his contacts paid off as the Chinese lenders stayed with us during the crisis while our own too-big-to-fail banks stopped doing business with each other and collectively plunged themselves into insolvency. Remember that firms such as Merrill Lynch, Citibank and almost all major banks and investment companies were bankrupt until we taxpayers stepped in to save them all.

One could argue that China cared more about America than our large banks did, but a fair assumption could also be their realization that that the two countries were joined at the hip --- plus, they trusted Hank Paulson. “Dealing with China” chronicles the strides the Chinese have taken to bring discipline and sophistication to their financial process. In October of last year, I wrote about the extent to which lackluster performance of China funds over the previous five years was probably a sign that they were poised to take off before long.

For young investors a long way from retirement, investing at least some money in China could offer some diversification while the high volatility will further reward those adding a steady flow of inbound money to the funds on a regular basis. For older investors who plan to always have some money available for heirs someday, a small percentage of the portfolio invested in China may contribute to a legacy that may someday reflect some foresight.