DBS CEO: Yuan, not PMI, is the big China risk

But Gupta noted that "the contraction in industry and manufacturing is being engineered by the Chinese." China's policymakers have been working to transition the economy away from a focus on manufacturing and toward consumption.

"For five years, the world told the Chinese that they were over-invested, they needed to scale back on overcapacity , they needed to scale back on manufacturing, they needed to shift to a consumption economy," he said. "For the last two years, the Chinese have been focused on trying to do that. When you do that, you should expect the PMI to be negative, under 50."

"This focus on the PMI at a macro level frankly is not a sensible thing," he added. "It's exactly what you want the economy to do."

But Gupta highlighted that was not overly sanguine on the risks China posed to investors.

"The macro economy in China is not what you need to worry about. It's growing at 6-7 percent. It's going to continue to grow at 6-7 percent," Gupta said. But he added, "You could fall on the wrong side of some massive market volatility."

The single biggest market risk was weakness in the renminbi, he said.

The offshore yuan fell to 6.7418 against the greenback on Thursday, the lowest rate of exchange since at least the last quarter of 2010, when the offshore yuan was introduced, and a discount to the onshore yuan's 6.5750 level.

While the yuan is primarily traded on the mainland and subject to strict central bank supervision, its offshore counterpart is accessible to everyone. The trigger for the latest slump came after a series of weaker fixings by the People's Bank of China (PBOC); on Thursday, the PBOC set the onshore yuan midpoint rate at 6.5646 per dollar, the weakest fix since 2011 and suggesting policymakers are allowing a faster pace of depreciation.

The currency is a big risk because China's corporates have taken on a lot of debt, and much of was unhedged, dollar-denominated borrowing, Gupta noted.

"A lot of the Chinese corporates will see in the next year or two what (Southeast Asia) saw in 1998. A lot of dollar borrowing is unhedged and therefore your capacity to be able to service debt is going to be challenged," he explained.

The Asian Financial Crisis was set off in 1998 by a surfeit of dollar-denominated debt in countries that had pegged their currencies to the greenback, but were forced to devalue.

China's total outstanding external debt was at $1.53 trillion at the end of September, according to official data.

Gupta expects China to allow more companies to default in the coming year.

"That is part of the squeezing out the excess capacity. They're going to let companies go," he said.