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By GREGORY ZUCKERMAN, WSJ

Investing in China is the only way to enjoy heady gains over the next few years, bulls say.

Bears counter that investors risk huge losses unless they protect against a bursting of what they view as a bubble in China. Such an event could rock global markets, they warn.

Adding to the challenges for investors: Betting on — or against — China is not easy.

All kinds of Chinese companies are demonstrating rapid growth, and many have public shares. The value of shares of Chinese companies is more than $3.7 trillion.

Some, led by state-owned enterprises, rank among the world’s largest companies. China Mobile, for example, is the world’s largest mobile-phone company by subscribers; its stock trades as American depositary shares on U.S. markets under the symbol CHL. Depositary shares of the largest oil and gas producer, China Petrochemical (Sinopec Group), trade in the U.S. under the symbol SNP. Baoshan Iron & Steel, China’s biggest publicly traded steel maker, is listed on only the Shanghai Stock Exchange.

Foreigners need a permit to buy shares in China’s domestic stock markets. Permits are expensive and hard to get so foreign capital amounts to less than 1% of those markets.

More companies, even those that are majority owned by the government, are selling shares to investors. Global initial public offerings of Chinese companies, including those based in Hong Kong, amounted to $126 billion in 2010, according to data tracker Dealogic, up from $54 billion in 2009. By comparison, less than $34 billion of U.S. IPOs took place in 2010, the second consecutive year that Chinese companies topped U.S. companies in IPO issuance.

There are drawbacks here as well — few Chinese companies share the level of financial transparency of Western companies.

That’s why some say the best way to wager on the growing nation is through shares of Western companies with expanding operations in the country. One example: General Motors, which now sells more Buicks in China than in the U.S. Chinese sales are responsible for more than 25% of profits earned by BMW and Mercedes-Benz. Other shares bullish investors are buying include Apple, chemical provider Solutia and Yum Brands.

But bears warn that investors could suffer losses in some global companies that have been bid up because of their Chinese operations. They urge investors to take profits from shares like Vale, the huge Brazilian commodity producer, which might be hurt if China’s growth slows. Even investors who don’t usually short overpriced shares should consider buying some protection, such as a bearish exchange-traded fund that could rise in value if China runs into economic problems, bears say.

Here are the bullish and bearish views on China, and how various investors are laying out their strategies.

The Bulls

China likely emerged as the world’s second-largest economy in 2010. The nation is expected to show close to 10% growth in both 2010 and 2011, far outstripping the U.S. and most developed nations. Stock-trading volume on Chinese and Hong Kong exchanges now rivals that of U.S. markets.

Key to the bulls: The nation, which enjoys $2.6 trillion of foreign-currency reserves, remains only partially urbanized. The rural-to-urban shift, one of the largest human migrations in history, is helping create a new middle class that is embracing higher standards of living. That leads to ripe investment opportunities.

Daniel Arbess, who runs a hedge fund for Perella Weinberg Partners, has been profiting by buying shares of global companies, like Apple, helped by Chinese growth, and betting against those having a hard time competing with Chinese rivals.

“Analysts have been so focused on Apple’s blistering growth at home that they are only now just starting to contemplate how giant the opportunity is in China,” says Mr. Arbess, who predicts that as China’s middle class grows, the nation soon will represent as much as 20% of Apple’s revenues. “Over the next 10 years, China will become by far the largest market for Apple and other global consumer brands.”

“The one ‘Chinese’ stock that we have purchased and do own is Baidu — the Google of China,” says Jeffrey Rubin of Birinyi Associates, who generally is cautious about investing in China. “As the Chinese government allows more and more access to the Internet and more freedoms are allowed, the Chinese population will head toward the Internet. And Baidu [BIDU] is a direct benefit of that growth.”

“While a slowdown in China is inevitable, as nothing grows for 10% a year forever,” Mr. Rubin says, “trying to predict when that will be is a losing game. Investors need to focus on stocks that will benefit from the long-term prospects of China and not what will happen over the next 12 months.”

For investors wary of individual shares, Rob Lutts of Cabot Money Management recommends ETFs such as the SPDR S&P China ETF (GXC) and iShares FTSE China 25 Index Fund (FXI) and Morgan Stanley China A Share Fund (CAF), a closed-end fund.

The Bears

Chinese authorities are trying to keep growth strong so employment gains continue. But they’re also pressing the brakes on inflation, with prices growing at an annual rate of more than 5%, and trying to rein in real-estate speculation. Skeptics doubt they can pull it all off.

For foreign investors worried that a downturn in China could cripple their portfolios, Citigroup strategist Tobias Levkovich recommends betting against industrial-related commodities, since “in some cases China accounts for 50% to 75% of incremental demand,” and increasing exposure to the U.S. dollar, which likely would be boosted if investors fear a Chinese downturn.

Some bears are shorting the US PowerShares DB Base Metals Fund (DBB), an ETF that aims to track the performance of commodities such as aluminum, zinc and copper that is up more than 25% in the past year.

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