China’s economy may not be expanding at the torrid pace it was a few years ago, but it remains one of the strongest on the globe and is growing at a solid and sustainable rate.

Most economic forecasts estimate gross domestic product (GDP) growth of 7%-7.5% in 2014, about the same rate expected for 2013 and also the rate targeted by China’s government officials as being sustainable. Assuming there is no trouble in China’s key export markets, including the U.S. and Europe, inflation stays under control and interest rates remain relatively stable, forecasters and fund portfolio managers are expecting a pleasing Goldilocks scenario – not too hot and not too cold.

“The new China story is a quality story, not a quantity story,” says Chuk Wong, vice president and lead manager of Dynamic Far East Value Fund, sponsored by 1832 Asset Management LP of Toronto, a subsidiary of Bank of Nova Scotia. “The government is still spending on infrastructure projects, and that will go on, but the rest of China is catching up. There will be a gradual transition from an investment-driven economy to one that is led by consumption.”

Figures released by China’s National Bureau of Statistics in late 2013 showed a healthier rate of growth than had been anticipated earlier in the year, when a slowdown looked imminent. Industrial output was up by 10% in November from a year earlier, and retail sales increased by 13.7%. The numbers followed respectable trade data, showing November exports gaining almost 13% from a year earlier. In the first eleven months of the year, investment in fixed assets such as equipment and machinery expanded by almost 20% vs the comparable period a year earlier.

The closely watched purchasing manager’s index, an official gauge of manufacturing activity compiled by the statistics bureau, was at 51.4 in November – firmly on the positive side of the 50-point line that divides economic expansion from contraction – although lower than the October reading, which was the highest level in 19 months.

China still faces risks, including factory overcapacity, excessive corporate debt and slower export demand if Europe and the U.S. see their economic growth stall. China’s government has ordered more than 1,400 companies in 19 industries to cut excess production capacity, and local officials have been charged with monitoring output.

Premier Xi Jinping’s government also has devised a series of reforms aimed at stimulating and rebalancing economic activity in what is now the globe’s second-largest economy. These initiatives include establishing a free trade zone in Shanghai and loosening China’s longtime policy of one child per couple (if one partner in a married couple is an only child, that couple now may have two children).

Shanghai’s new free trade zone will encourage public financings and the free flow of capital. It will consist of a 28-square-kilometer financial hub in which foreign banks may operate. These reforms will ease the path for foreign investors looking to enter China and for Chinese companies going abroad.

“The new policies are intended to deregulate certain parts of the Chinese economy and allow them to meet international standards,” says Eileen Dibb, portfolio manager with Pyramis Global Advisors, a unit of Boston-based FMR LLC, who manages portfolios for Fidelity Far East Fund and Fidelity AsiaStar Fund. “The emphasis is moving from infrastructure and commodities to non-manufacturing industries such as banking and insurance.”

Dibb’s fund portfolios are focusing on companies that will benefit from the deregulation of capital markets, particularly China’s banks. Her funds hold positions in China Construction Bank Corp. and the Bank of China Ltd.

Tim Leung, vice president and head of Asian equities at I.G. Investment Management (H.K.) Ltd., and portfolio manager of Investors Pacific Fund and Investors Greater China Fund, sponsored by Winnipeg-based Investors Group Inc., is focused on domestic consumption as Chinese society becomes more affluent, and he likes sectors such as automobiles and consumer staples. Among the Investors funds’ holdings is Want Want China Holdings Ltd., a manufacturer of rice crackers and beverages. Leung also likes Xinyi Glass Holdings Ltd., a glass manufacturer exposed to growth in the housing, automobile and high-technology industries.

“China has at least 400 million people in the middle class,” says Leung. “And the experience of the younger generation is very different from the agricultural life.”

Wong also is playing the consumption theme and likes China Modern Diary Holdings Ltd., a producer of milk-based products. As incomes rise, he says, consumers are favouring higher-quality products produced under hygienic standards.

Mark Lin, vice president of international equities for CIBC Asset Management Inc. in Montreal and portfolio manager of CIBC Asia-Pacific Fund, says firms based in Hong Kong and China make up the largest share of this multi-country Asia fund with a combined weighting of 46%. The change in the one-child policy will result, Lin says, in more newborns; thus, he is investing in Hengan International Group Co., a producer of diapers and other sanitary products.

Growing affluence in China is fuelling gambling as a form of entertainment, with the domestic gaming industry growing by about 20% a year. Lin’s CIBC fund holds positions in four companies (China Sands Ltd., Wynn Macau, Galaxy Entertainment Group Ltd. and SJM Holdings Ltd.) with operations in the massive gambling resort in Macau, where only six companies are licensed to operate.

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