The market these days is mainly focused on the drama unfolding in Europe or the fiscal cliff looming in the US. Investors hoping to find solace in emerging markets like China, however, may want to consider a few points.In my article from last July entitled “China: The Dark Side of the Moon”, I suggested: “The risk with all this rapid growth and explosive investment is that it may have been done with little regard for the returns it will generate and the incremental efficiencies it will provide. Any significant slowdown in the rate of growth for Chinese construction would have serious negative follow-on effects for commodity prices and industrial product sales. It would also negatively affect those nations whose wealth and growth in GDP is closely associated with commodity demand from China like Australia, South Africa and Brazil.”It appears this has happened. Chinese stocks are down some 18 percent, commodities are down over 22 percent while US equities have flatlined over the same period.I mentioned at the time that “The long-term growth story of China is very compelling and often quoted but its darker side needs to be considered as well.” This has been the case for emerging markets in general over the past five years or so. Glamour rarely outperforms value. Remember the BRICs (Brazil, Russia, India, and China)? Remember how they were going to decouple and with their “higher growth” and surely outperform the developed markets? Well we didn’t really de-couple. In fact developed markets, even with the dreadful debt crisis in Europe, have outperformed the emerging BRIC countries since the end of 2007 and through the financial crisis. The S&P 500 has fared even better.Now what? We have seen the collapse in Chinese stocks and commodities. Is this not a great buying opportunity? The correct answer, as usual, is maybe, depending on how you think the story will play out. The growth story of China is not incorrect. It is a valid thesis and concept. China slowing towards GDP growth rates in the seven percent range is not the end of the world. But like I mentioned before, we need to look at more than just GDP growth. This forum is not long enough to comprehensively cover all the aspects of Chinese growth but I’ll touch on a few aspects that you can reflect on.1. Credit Bubble: We all like to mention the huge capital and investment projects booming through China. The railroads, the buildings, the bridges and airports. Before you get too excited ask yourself how this was financed? The answer, of course is credit. You can see this in the soaring local government loan books and Chinese banks. You also see it in Chinese stocks. While US corporations have done an exceedingly great job of deleveraging over the past few years, Chinese companies continue to pile on the debt. This is not necessarily a problem unless growth slows too much.It’s impossible to know exactly when China will reach its debt limits because it’s hard to see what the true debt figure is. It does have a limit, though.2. Valuation Issue: Chinese stocks look cheap now. They trade at only about eight times forward earnings estimates. The problem is the quality. The MSCI China index actually has a NEGATIVE free cash flow yield compared to the S&P 500 free cash flow yield in excess of eight percent. Some may argue it is normal to see high growth companies have negative cash flows as they are continuously investing. This is true but the danger lies in when the growth rate shifts.3. Rebalancing: The Chinese government is in the process of trying to rebalance the composition of the economy, moving away from investment spending and exports towards a consumption driven model. Consumption in most Asian economies already represents 50-55 percent of GDP, whereas in China it only represented 34 percent of the economy in 2010, down from 46 percent in 2000.Overall consumption did not fall; it just did not grow nearly as fast as investment over the same period. At the latest CFA Annual Conference, Michael Pettis, an economist from Peking University suggested that China will try to achieve a 50 percent contribution to GDP from consumption within the next 10 years but this will take a lot of political will.Household spending will need to outpace the economy by four percent a year over this time frame, which could certainly happen if incentives are aligned. The government will need to provide social safety nets and let the Renminbi appreciate in order remove the need to save for a rainy day and stimulate spending.On the other hand, if China has experienced a credit and investment bubble, households can’t do two things at once: save the banks and increase their consumption. Pettis believes this transition will lead to a sustained longer term three percent growth rate for China. I don’t think many economists are predicting this.For someone looking to invest today, China’s near term prospects still look daunting. In its current state, China is still an export-driven economy that is heavily reliant on demand form developed markets like Europe and the US. Some 20 percent of exports that China produces are sent to Europe, which looks to be sliding back into a recession. This is likely to hamstring a quick recovery in China’s domestic economy.Policy makers have stepped up efforts to reignite growth by cutting interest rates and easing lending. Time will tell if this will create a shift in growth for the back-end of the year. We still prefer to gain exposure to China indirectly: through global companies who do not solely rely on China to grow and have enviable balance sheets.Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd.