The chances that China will eventually suffer a so-called “hard-landing” if external events and domestic policy changes bite is low, argue economists at PIMCO, the US-based bond investment giant.

China is working from a healthy, strong base of low debt when compared with gross domestic product, consumers who are not dependent on borrowing, and a strong balance sheet for the country as a whole, the firm argues in a briefing note.

The consensus forecast for China's GDP growth over the next 12 months to the third quarter of 2011 is 9.1 per cent, vastly in front of say, the US, at 2.6 per cent, Europe, at 1.3 per cent, or Japan, at an anaemic 0.3 per cent.

“Longer-term challenges include promoting financial market development and fostering a broader range of investable assets, as well as reorientating the economy toward domestic sources of demand, notably consumption,” PIMCO said.

“Separately, concerns that the property market could overheat, and related concerns regarding the potential risk for a banking crisis, have dominated headlines. However, the recent withdrawal of policy stimulus is intended to cool the economy toward a more manageable pace over the medium term, and avoid a sharp boom-bust asset market cycle; we do not believe it is targeted toward asset prices,” it said.

“Credit losses will likely be significantly higher under more extreme stress conditions. Even then, we estimate the potential recapitalisation cost would be roughly similar to levels that prompted the restructuring of major Chinese state-owned banks from 1998 to 2005,” the note continued.

The authors of the briefing note were Tomoya Masanao, managing director of the Tokyo office of PIMCO; Robert Mead, executive vice president in the Sydney office, and Chia-Liang Lian, senior vice president and emerging markets portfolio manager in the Singapore office.

Asked about the most attractive investment areas in emerging Asia, Lian mentioned dollar-denominated bonds issued by emerging Asian governments, banks and companies.

“As emerging Asia economies present stronger growth dynamics and become more prominent destinations for capital, the region’s currencies are likely to appreciate relative to the currencies of developed economies. The buying in the Chinese yuan, and other Asian currencies like the Korean won, Singapore dollar and Philippine peso reflect how important exchange rate appreciation in emerging Asia will likely be in rebalancing the global economy,” Lian continued.

Turning to Japan, Masanao said he thinks that seven-year to ten-year Japanese government bonds offered the chance for investors to prudently acquire some yield benefits, although the potential for capital gains is limited.

“As for our currency strategy, we currently remain neutral on the Japanese yen. Fundamentally, Japan’s current account surplus and deflation (which results in high real interest rates) will likely remain supportive for the Japanese yen. Expectations that the Federal Reserve will be more aggressive than the BoJ when it comes to monetary easing should also be a yen positive vs the US dollar. But for fundamental attractiveness and long-term valuation, we see much better value in currencies in emerging Asia,” Masanao said.