Chinese equities have lost more than 60 per cent of their value this year – but some analysts now believe company valuations are at bargain levels.

The loss represents quite a fall from grace. Last year, the UK’s top performing unit trust across all sectors, Gartmore China Opportunities, returned more than 70 per cent. This year, it has lost 47 per cent. However, the Chinese government has stepped in with proposals to prop up the country’s economy – prompting analysts to look at the country with a more optimistic eye.

Last week, it announced a fiscal stimulus equivalent to 15 per cent of GDP over two years, to stimulate consumer spending and invest in low income housing and improving infrastructure. Craig Russell, chief market strategist at Saxo Bank, believes it is the most comprehensive stimulus package of any nation so far. He also thinks China will continue to cut interest rates and stop its currency appreciating too much in order to help exporters.

He argues that the increase in government spending will offset any slowdown in consumer spending – though he predicts this will still rise by 15 per cent in 2009.

Certain shares are expected to do well, such as rail companies, concrete businesses and banks that will be the initial beneficiaries of the government funds.

Bank of America this week paid $7bn to lift its stake in China’s second-largest bank, the China Construction Bank – which Russell argues is a play on the expected growth.

Analysts also point to the fact that the Chinese government has roughly $2,000bn in cash reserves to spend on reviving its economy – unlike western economies that are heavily in debt.

“I suspect I might be contrarian and say China is my favourite country pick for next year as most people are writing it off,” says Mark Dampier at Hargreaves Lansdown.

Many investors had been shunning emerging markets because their exports are expected to slow as the west falls into a recession.

But the long-term growth prospects for China remain strong and Dampier argues: “I would say the crash gives you a better entry point as prices are back to what they were four or five years ago.”

Expectations for Chinese GDP growth next year vary – some put it as low as 5 per cent, others at more than 8 per cent – but all agree it will be less than the 11.9 per cent seen in 2007.

However, while a Merrill Lynch poll of institutional fund managers this month showed record pessimism for Chinese growth next year, the managers are still overweight in China in record numbers – 67 per cent were overweight in November, compared with just 19 per cent in October.

Michael Hartnett, chief emerging markets strategist at Merrill Lynch, says this is partly because of the “first in, first out” theory, as China was the first equity market to enter a bear market.

“There’s a lot more bad news discounted in China than other equity markets,” he says.

And compared with other so-called Bric economies (Brazil, Russia, India and China), China’s currency, the renminbi, has been “a rock of stability by comparison”.

Alan Gibbs at JO Hambro is overweight in China in his Asian fund and has been gradually increasing this in the past three months. “The risks of equity investment everywhere are still high, but if you’re looking at the fundamentals, the economic backdrop in China is on the whole very comforting,” he says.

He argues that the stock market fall has burst what he says was a bubble in Chinese equities that had made it hard for fund managers to find value for the past five years.

He also believes the intentions of the Chinese government are more meaningful than attempts by western governments to control the credit crisis – so the rescue package should be taken seriously. “The government has a good record of being effective in implementing what it wants to implement,” he says. “For all that’s said about China embracing capitalism, the government still owns quite a large proportion of the corporate sector and the Communist Party is important in a way that the Labour party here is not.”

Ewan Markson-Brown at Newton Investment Management is focusing on the property sector, which he believes will stay resilient because of the ongoing urbanisation of the population.

He thinks the next six to nine months will be an “amazing opportunity” to buy growth companies, as shares are trading so cheaply compared with valuations.

Fen Sung at Premier Asset Management is looking at healthcare stocks. He says this is another growing area in China as the country is no longer so reliant on imports.

His picks are Shandong Weigao, a syringe supplier to all the major hospitals and Sino Biopharmaceutical, the producer of the number two hepatitis B drug in China.

Risks, of course, remain. Managers agree the biggest of these is how far consumer spending – particularly in the US – slows.