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The risky China assets you may want to own

All the fears about Chinese banks may very well come to pass, but that's no reason not to buy their stocks, JPMorgan said.

Chinese bank stocks have tumbled to trade at what look like bargain levels below book value and around five times earnings.

(Read more: Here's how bad China's bad loan problem could get)

But few are nibbling, especially since China's state auditor said in a report last month that local governments owe almost $3 trillion in outstanding debt, a pile economists say is one of the biggest threats facing the mainland's economy. The prospect of defaults, as much of the money funded non-profitable projects, has also stoked concerns Chinese banks will be left with a bad debt pile that threatens financial stability.

"Clearly, things are worse than the banks are actually reporting," Richard Titherington, head of global emerging markets at JPMorgan Asset Management, told CNBC.

Liu Jin | AFP | Getty Images

"Everybody hates them," he noted. "They hate them because there are lots of things to worry about. Otherwise, there wouldn't be trading at that valuation."

But that's no reason not to buy them, he said.

"Many people are skeptical about China for very good reasons. The question from an equity market investor's perspective is to what extent has that all been priced in to markets," he said. "Given the fact that we are at very low valuations, a lot of very legitimate concerns are already priced in to the market."

(Read more: Are China bank stocks cheap or just crummy?)

China's credit concerns are also hardly a secret, he noted. "The Chinese know perfectly well they've got to restructure the financial sector," he said. "They're moving in the right direction."

It also isn't a given that the listed plays will bear the brunt of any loan defaults, he noted.

"The problems that exist in the Chinese financial sector are much more at the lower end of the spectrum. I'm sure you will have defaults. You might even have bank failures. But they're much more likely to be at the local and provincial banks than in the big listed banks," he said.

(Read more: China's bad-loan skeletons to haunt markets)

Titherington isn't alone in seeing a bargain-buying opportunity.

"We see the current weakness as an opportunity for investors to add to their stakes of large state-owned banks," CIMB said in a note after the sector came under increased pressure earlier this week when China issued fresh curbs on its shadow banking system.

"At this stage, the sector's most important catalyst is the gradual emergence of benefits as a result of China's tentative steps towards economic reform," it said.

CIMB likes large state-owned banks like ICBC, China Construction Bank and Agricultural Bank of China. But it expects banks which have relied heavily on links to the shadow banking system through large exposures to wealth-management products or innovative interbank credit, may face an earnings hit. Those banks include Bank of Communications, China Merchants Bank, Citic Bank, Minsheng Banking and Chongqing Rural Bank.

Deutsche Bank also has a positive view on the sector, saying it would be "hard to get cheaper than current levels." It added that banks' distressed valuations were at odds with the country's strong capital inflows, which have historically been a leading indicator for economic growth.

"The government commitments to maintain a stable GDP (gross domestic product) growth should be enough to lead to a re-rating of the listed banks in 2014," the bank said.

Deutsche Bank's top picks are Bank of China and Agricultural Bank of China among the Hong Kong-listed banks and China Everbright Bank and Bank of Beijing.

(Read more: Why foreign banks pay over the odds for a China foothold)

Others aren't as convinced. Nomura sees trading opportunities in the Hong Kong-listed Chinese banks, due to their low valuations, but in the longer-term, it doesn't expect the stocks' valuations to expand much.

"Banks are still facing headwinds from rising NPLs (non-performing loans), NIM (net interest margin) compression (due to further interest rate liberalization) and rising competition (especially from online financing and private banks)," it said in a note.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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