The promise of the Chinese market is both alluring and foreboding at the same time. It is enticing due to the country’s estimated average 9.3% economic growth rate for the past 25 years, 1.3-billion population and the opening of its markets to foreign investment after decades of anti-free market policies carried out by backward-thinking communist leaders. However, skeptics point to empty buildings constructed with funds from the questionable loans of Chinese government-controlled banks as one of many reasons not to be swept up in the belief that China has transformed itself into a stable, world economic leader.

My view is mixed. I acknowledge that China holds great potential as a market to sell goods, especially as its people begin to earn more money to buy them. I also think China is gaining clout in the world as a net exporter of goods that has helped the country to hoard U.S. dollars. Further, China is keeping its goods relatively inexpensive to maintain its exporting advantage with most other countries by artificially limiting the value of its currency, the yuan.

On the other hand, a significant part of China’s annual growth could well be coming from government spending to pursue projects that may not generate a legitimate return on investment. One example is the so-called “Bird’s Nest” stadium in Beijing that still has not found a significant use since its role as the high-profile venue for the opening and closing ceremonies at the 2008 Summer Olympics. Also keep in mind that just because something has potential does not mean it will be realized anytime soon. Even though certain Chinese companies may claim sharply rising profits and revenues, the absence of any requirement to use Generally Accepted Accounting Principles (GAAP) in reporting financial information in the country leaves reason for doubt.

For those who believe in a Chinese miracle, you may want to consider investing in the iShares FTSE/Xinhua China 25 Index (FXI), which has outperformed the S&P 500 (GSPC) convincingly during the past five years. The five-year performance chart below of FXI and the S&P 500 shows that difference well.

FXI, an exchange-traded fund (ETF) launched October 5, 2004, seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index. When the index rises 1%, FXI should gain 1%, too. FXI is well-established and has a large average daily trading volume of 21 million shares.

If you want to double up a bullish bet on the Chinese market, you can try the ProShares Ultra FTSE/Xinhua China 25 (XPP), which seeks daily investment results, before fees and expenses, that would be twice the daily performance the FTSE/Xinhua China 25 Index. With this leveraged ETF, a 1% increase in the index ideally would be accompanied by a 2% boost in XPP. That fund started June 2, 2009, so it is the newcomer of the pair and has an average daily trading volume of 33,244 shares. I generally like to see a fund generate an average trading volume of 100,000 shares before I recommend it.

If you’re a skeptic about China and think its market is vulnerable for a big hit, consider the ProShares UltraShort FTSE/Xinhua China 25 (FXP). That fund, launched November 6, 2007, is intended to seek daily investment results, before fees and expenses, that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. However, the compounding of daily returns will cause the fund’s returns to differ in the amount and direction of the target return for the same period. As a result, just because FXI may fall 4%, do not assume the return of FXP will reach 8%. FXP has an impressive average daily trading volume of 3.1 million shares.

Finally, I urge you to stay cautious about going double-long or double-short on the Chinese market. Those leveraged funds can be volatile, and they may take you and your investment for a wild ride in either direction.

If you want my advice about which ETFs to buy and to sell, please sign up for my ETF Trader service by clicking here. As always, I am glad to answer your questions about ETFs, so do not hesitate to email me if you have one. To send an ETF question to me, simply click here. You may see your question answered in an upcoming ETF Talk.