While there are big challenges for China as it transitions its economy, some of the fears currently swirling need to be put into perspective, argues an investment house focusing on Asia.

Investors – or some of them at least – need to calm down about China.

That’s the message from Matthews Asia, a San Francisco-headquartered firm specialising in Asian investments. As fears of have emerged recently about China’s property market (potential crash), its banking and “shadow banking” sectors (ditto) and decelerating economic growth (impact on other countries), some wealth managers have warned of risks.

For example, Goldman Sachs (see here) recently told this publication the risks of a banking crisis in China are very high. A recent default on a wealth management product sold by ICBC has been recently averted, but only in the nick of time (see here). Some older investors may fret about parallels between China now and Japan in its pre-crash period in the late 1980s. And the fact that investment accounts for almost half of Chinese GDP at present has sparked fears about big over-investment.

Matthews Asia, managing $25.9 billion of client money, wants concerns to be put into  perspective, but it doesn’t dismiss them. In a white paper called China – Separating Fact From Fiction, it addresses challenges the country faces as it tries to switch from relying on exports to a more balanced position.

The paper says misconceptions linger with regard to China’s growth, indebtedness and ongoing reforms which have led to incorrect assumptions regarding a potential deeper economic slowdown and more serious credit crunch.

“Matthews Asia’s investment team sees that careful consideration of China’s credit architecture, banking system, productivity measures and recent moves toward economic liberalization and transparency reveals that China is more likely on a measured and sustainable path of economic growth that is being supported by a serious attempt to engineer a slowdown and implement step-by-step reforms,” the firm said in a statement about its views.

The white paper examines issues such as investment and “over-investment”; government debt; expanding the bond market and diversifying financial risk; productivity growth; banking and shadow banking; taming the “credit dragon;” institutional transparency; liberalization of the financial sector; and the challenge of transitioning China toward more complex, higher value-add economic activity.

The paper also takes a look at some of the more recent intriguing initiatives being undertaken to inject greater transparency and market forces into economic activity.

Take a deeper look
“Given the remarkable transformation of the Chinese economy over the past three decades, we see the decision by the Chinese government to rebalance the economy as a very necessary step. However, a combination of slower growth, rising debt concerns and liquidity issues in the banking sector contributed to rather negative sentiment towards the country in 2013. We, therefore, felt this was an opportune time to take a deeper look at the Chinese economy and address some of the concerns that have been raised over the past year or so,” Robert Horrocks, Matthews Asia chief investment officer.

“From our analysis, we see the Chinese economy as strong enough to withstand many of the headwinds it now faces and more than capable of moving along a sustainable path of moderate economic growth supported by step-by-step reforms. In addition, while much attention has been placed on China’s macroeconomic outlook, it’s easy to forget that at a corporate level there are many healthy companies successfully navigating their growth path at a micro-level. With this in mind, despite the country undergoing an important economic transition, we see no reason to believe that it will not remain one of the key investment themes over the coming year.”