China's total debt-to-GDP ratio has risen by almost 60 percentage points since the global financial crisis to nearly 210%, well above emerging-market peers. The rapid growth in credit, its apparently diminished effectiveness in generating GDP growth, and a burgeoning shadow banking system concern investors and policymakers.

The highest-risk borrowers, in our view, are corporates in overcapacity industries and local governments' special purpose finance vehicles. Some aspects of corporate credit stress in China are approaching 2008 levels, but prospects for rapid relief via large fiscal stimulus, sharp external recovery, and lower funding costs as in 2009/2010 appear unlikely.

Slowing leverage growth may pose headwinds for investment and overall GDP growth. However, banking sector leverage is moderate, the system as a whole is not reliant on external funding, and regulators are unlikely to force banks to "mark to market" NPLs, all of which should help mitigate risks of an acute banking crisis. Sovereign concerns appear remote.

The new Chinese leadership has shifted towards more proactive regulation, in contrast to previous policymakers, who tended to prioritize cyclical growth and financial diversification. In our view, more proactive reform may be less supportive for growth (and equities, especially cyclicals) near-term but should help to contain potential credit losses and reduce systemic risks

David Fuller's view The last two paragraphs in this summary are particularly helpful. Foreign debts are not the problem. Moreover, the Chinese consumer does not appear to be in trouble. However, there are plenty of corporate and regional government debt / leverage excesses.

So where does this leave China's stock market?

The CSI 300 Index is described by Bloomberg as "a freefloat-weighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges." It is currently languishing near its December low and needs upward dynamics to offset the risk of some additional weakness. However, the current low valuations for China include an historic PER of 10.83 and yield of 2.76. So the risk is probably not excessive, despite a recent loss of upside form for most global stock market indices.

Nevertheless, there are only three sectors performing in China and they mainly cater to consumers: Info Tech, Telecoms and Healthcare. I would favour these while they continue to show such decisive relative strength.