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My first foray into investing in China for clients was in 2003 with Petrochina (NYSE:PTR), which I later replaced with Sinopec (NYSE:SNP). When I first started blogging, I specifically made two overriding points: That China was clearly becoming more important in the world economic order (I obviously was not the first mover here), and that it would be a very complicated investment destination for a long time.

While these observations are obvious, they are also very important. Concerns about Chinese debt are growing; there are more articles being written about real estate debt that seems destined to go bad, the debt problems of the municipalities, and Temasek bailing on (not out) the Chinese banks. A point I made a long time ago was that there were bound to be mistakes in managing the country's new-found prosperity.

This has led me to have some pretty consistent views on how to invest in the country. I think energy, utilities, industrials, materials and consumer stocks make more sense than financials, real estate and exported related companies. Our exposure for clients is low and comes by virtue of China's weight in the Market Vectors Coal ETF (NYSEARCA:KOL) and iShares Emerging Market Infrastructure ETF (NASDAQ:EMIF).

Aside from the debt issues mentioned above, there are also concerns with inflation heating up (there are discrepancies between CPI and the deflator) and growth slowing down (it seems like growth has been 9-10% for years with concerns it will drop to 5-6%).

The debt and growing pains issues contribute to the bear case on China. However, the Shanghai Composite is down more than 50% from its late 2007 high. The Hang Seng Index is down almost 25% from its high water mark and the Hang Seng Enterprises Index, a.k.a. the H-share market, is down about 35% from its high. Obviously these markets could get crushed from here, but the idea that some of the above threats are priced in seems plausible -- and I think the market will not get hit as hard as some do, should those issues come home to roost.

The banks could get annihilated, but I think things like energy, utilities and certain industrials would hold up or recover reasonably quickly if there is broad selling. Please note that our exposure is small but targeted in areas where I think ongoing business has a high likelihood of not being interrupted.