Will China bounce back as a growth market?

— -- You may have heard that China is the world's largest steel producer. You may have heard that China's economy is growing more than three times as fast as ours. And you may have invested in a China fund because of all the glowing reports you've heard about China.

Now you may be wondering what on earth you were thinking. The average China fund is down 21.1% this year. Will China snap back as a leading growth market?

Probably not soon. If you want to make a long-term investment in China, do so gradually — and hang on.

China's growth has been nothing short of stupendous. Chinese gross domestic product was $357 billion in 1990, according to the World Bank; it was $5.9 trillion 2010. China's GDP grew 9.1% the 12 months ended September, vs. 2.5% for the U.S.

Much of that growth has been in building infrastructure. Just one example: China's national highway system now has 45,554 miles of road, about equal to the U.S. national highway total of 46,876, says Daniel Rohr in a thoughtful piece at Morningstar.com.

China's spending binge, combined with robust exports, sent China funds rocketing. The average China fund gained 64.5% in 2009, according to Morningstar, and tacked on an additional 13% gain in 2010.

This year, however, China funds have been dismal. What happened?

Basically, China tapped the brakes, and Chinese stocks went through the windshield. China's central bank was worried about soaring prices, which are the result of a rapidly growing economy. Inflation hit a 6.5% pace the 12 months ended in July, says Richard Gao, lead manager of Matthews China Fund.

Real estate prices, too, were soaring, thanks to easy credit and enthusiastic builders. "We're starting to see real estate developers cutting prices by substantial amounts, and transaction volume in China also going down," says Gao.

To slow the economy, China raised the reserve requirements for its banks. Reserves are the money banks use to cushion against losses — and it's money they can't lend. By raising reserve requirements, the Chinese government reduced the amount of money available to lend.

And, unlike many central banks, China's central bank can slow down lending fast. "The Communist Party controls lending," says Eric Stein, portfolio manager at Eaton Vance. "They can tell the banks when to lend and when to stop lending."

Europe's woes have taken their toll on China as well. Europe is China's top trading partner, and any slowdown in Europe means a slowdown in China's export market. To make matters worse, China's currency is pegged to the U.S. dollar. If the euro implodes, China's currency will soar along with the dollar, which will make Chinese goods more expensive abroad.

China's efforts to slow the economy seem to be working. Inflation fell to 5.5% in October, Gao says, and GDP growth moderated as well. "China is on the way of achieving a soft landing," Gao says.

A soft landing is not equally soft for all industries, however. For example, although China is roughly the same size as the U.S., the U.S. has three times as many cars, Rohr says. In other words, China may have enough roads at the moment, and spending on highways will probably shift into a lower gear the next few years.