HFM Columbus, an investment firm for high net worth individuals, warns that the risk of overheating in the Chinese economy is a reason for caution in how to maintain exposure to the fast-growing Asian economy.

A heavy stimulus last year by the Chinese government could mean the world’s second biggest economy may be facing a much more difficult year, said Rob Pemberton, investment director of HFM Columbus, a UK business.

While last year saw double digit growth in China’s gross domestic product and powering exports, rapid monetary growth and credit expansion could be followed by a rapid clampdown on such growth, with even the possibility of an upward revaluation of the Yuan.

“China has been a tremendous success story in the last decade both in terms of economic growth and through stock-market returns to investors. Economically and politically it has emerged as second only to the US in global importance, and has enjoyed the positive attentions of many commentators - but perhaps a more sanguine approach to this ‘economic miracle’ is called for,” Mr Pemberton said.

“Today’s ‘Sinophiles’ were quite possibly ‘Japanophiles’ back in 1990 - and it is not that long ago that we were lauding the economic success of Spain, Ireland and Iceland,” he said, referring to economies that have, with varying levels of severity, seen their fortunes decline.

Underpinning the hype [about China] is the problem that China is hugely misunderstood as an economy, he said.

“The important decision for the emerging market investor is not the level of economic and corporate profit growth, but the price being paid for it. It is dangerous to equate future share price returns solely with economic or profit growth,” said Mr Pemberton. “The bulk of share price advances frequently come from multiple expansion and China is no longer cheap at 14x 2010 earnings.”

Historically emerging markets used to trade at a discount to developed markets due to their record of instability but this is no longer the case, and China is now starting to feel somewhat pricey in a global market environment that is looking a lot less tolerant than last year, he added.