How do you solve a problem like China?

The country’s slowing growth is also a familiar story to investors, with GDP growth of 7.4 per cent reported in the first quarter of 2014, and remaining nearly flat at 7.5 per cent in the second quarter.

Reports suggest that when the Chinese government releases the latest figures on October 21 they will show a further decline in GDP growth in the third quarter.

But in the context of the pace of growth of many Western market economies, including the US, UK and much of the eurozone where growth has been marginal or in some cases has stalled completely, 7 per cent plus growth in China looks impressive.

How to assess China

Earlier in October, the publication of one key measure of GDP growth indicated that the country has overtaken the US as the world’s largest economy.

According to estimates by the International Monetary Fund (IMF), in terms of GDP based on purchasing power parity China has passed the US. It reached $17.6trn, or the equivalent of 16.5 per cent of the world’s purchasing power adjusted GDP in 2014, slightly ahead of the US at $17.4trn or 16.3 per cent. The US remains the largest economy when measured by real GDP.

David Stevenson, head of product and business development at Baring Asset Management, observes: “China has received a lot of criticism from across the globe regarding the threat of slowing economic growth relative to the record growth rate it’s experienced over the past two decades.

“In the same breath to also move the economy to a more sustainable consumption led model... the two don’t necessarily go hand-in-hand in the short term, as there are frictional losses to growth as you transition any economy.

“In our view the government continues to manage this transition in a highly controlled and committed manner through various initiatives, including the recent liquidity boost. We view this as part of the government’s economic reform plans for sustainable growth rather than a sign of distress.”

Mr Stevenson refers to the recent move by the country’s central bank, the People’s Bank of China, to inject £50bn into five Chinese banks.

China’s shadow banking sector has come under the spotlight recently: it has emerged in response to demand for credit and has grown up around the far more regulated banking industry in the country, sparking concerns about the risks it presents.

Mr Stevenson supports the government’s action, however.

“We welcome the move by China’s central bank to inject £50bn into the banking sector as part of its ongoing strategy to move loans from the shadow banking sector into the official banking channel and a liquidity boost of this size evidences the government’s commitment to this initiative.”

Short-term factors

Geopolitical tensions have been another cause of concern for investors following events in Russia and Ukraine, and in the Middle East. For China, the Occupy Central demonstrations in Hong Kong are a little closer to home.

Jan Dehn, head of research at Ashmore, believes a resolution is on the horizon.

“We think tensions between pro-democracy activists and the authorities in Hong Kong are likely to find a negotiated and peaceful resolution. Both sides have a lot to lose and therefore incentives not to let things get out of control.”

He continues: “In particular, China has great vested interests in making a success of Hong Kong, which is one of the main offshore centres for renminbi (RMB) trading, a business showcase for China and an economic powerhouse in its own right.

“Similarly, Hong Kong dwellers have higher levels of opportunity, greater wealth, and more freedom than the Chinese from mainland China.”

Elsewhere, in July this year the leaders of the Bric countries – Brazil, Russia, India, China and South Africa – announced the formation of a Brics Development Bank which has been established to fund infrastructure and sustainable development projects.

It will have $50bn of capital behind it, with $10bn contributed by each of the participating countries. A ‘contingent reserve arrangement’ which is due to be created at the same time as the Brics Bank will have $100bn at its disposal.

The majority of this will be coming from China, which is putting in $41bn, while the bank will have its headquarters in Shanghai, putting the country at the centre of this financial arrangement. If nothing else, it asserts China as a superpower capable of taking on some of the most developed economies in the world.

Longer-term prospects

In his most recent economic update, BNY Mellon’s chief economist Richard Hoey advises that behind all of the immediate risks and China is undergoing a permanent “downward shift” to a slower sustained growth rate.

He explains: “In China, we expect sustained expansion and a gradual downshift in Chinese trend growth over the coming years rather than the ‘Chinese financial meltdown scenario’ expected by more pessimistic analysts.”

In spite of its influence, however, the recent slowing rate of growth in China is causing some market jitters.

John Vail, chief global strategist at Tokyo-based Nikko Asset Management, believes that China’s economy will continue to slow faster than consensus forecasts. Although the asset manager’s global investment committee thinks that the country does not appear to be heading towards a ‘hard landing’.

In terms of investing in emerging markets more generally, Richard Titherington, chief investment officer and head of the emerging markets equity team at JP Morgan Asset Management highlights the risks.

“Many of the headwinds to emerging markets in the last year have died down, but there are still risks from a stronger US dollar and the prospect of higher interest rates from the US,” he acknowledges.

“Simply increasing broad exposure to emerging markets is no longer enough and it is necessary to discriminate between countries and regions. In each case, it is important to weigh up the risks of investing against the expected rewards.”

For Mr Stevenson the prospects for China are positive, pointing out that companies in sectors such as automation, private medical care and financials are benefiting from the country’s shift.

He adds: “The transition to a consumption-led economy is well underway as indicated by the successful, recent IPO of Alibaba, and will help spur long-term growth for China.”

Eleanor Duncan is deputy features editor at Investment Adviser

eleanor.duncan@ft.com