In the short-term, as you said, China looks very rocky…
Over-Reliance On Debt
There is a lot of alarming things going on their banking sector. The issue is that the performance of local governors is closely tied to GDP performance. This means that they have put pressure on the banks to turn on the credit taps when they have been in need in the past. This has created a culture of encouraging leverage and debt in general.
This is actually quite concerning as China’s central bank governor has mentioned that this is getting dangerous. Considering that his message was endorsed by the communist government, its a very worrying sign. Link: http://www.scmp.com/news/china/economy/article/2118656/root-cause-chinas-financial-fragility-according-its-central-bank
These warnings are especially concerning as the government has been trying desperately to cut back lending in recent years. China’s mini-crash in 2015 highlighted this issue, but it still persists.
Despite these short-term woes, China’s future is incredibly bright.
The Chinese economy is really only starting to flex its muscles in comparison to US. GDP per person in US is $57,000, whereas in China its $8,000. So if the Chinese reached a level of prosperity akin to the US in coming years (not greater than, simply the same level), their total GDP would grow nearly seven times its current level. If Chinese GDP is currently $11 trillion, it would not be unreasonable to assume that China’s total GDP could easily reach $77 trillion. To put this in perspective, US GDP is currently $18 trillion.
This figure is also more believable when you consider that china’s population is almost exactly x4 the US.
Another reason for the optimism is China’s very high savings rate. Currently the Chinese save 50% compared to GDP, almost the highest savings rates in the world and their bank deposits sit at about $26 trillion. When the Chinese begin shifting from a culture of saving to a culture of consumption, and start spending this $26 trillion on consumption, it will great incredible opportunity for companies all around the world.
This might take a few years, this might take a few decades. Nevertheless, the long-term prospects for China look very good.
Short-term - sell.
Long-term - buy and hold.