INVESTORS carried away by the current euphoria over China would do well to heed the words of caution an investment banker issued yesterday. ''There is a danger of seeing an economic giant and a financial pygmy,'' warned Timothy Beardson of Crosby Financial Holdings at a plenary session of the World Economic Forum. Mr Beardson, like many others, is optimistic about China. He believes that it could replace the US as the world's largest economy and that the size of its emerging capital markets could well surpass those of three Asian dragons added together. But Mr Beardson's optimism is tempered. He is seriously concerned that the mainland's inadequate financial instruments and intermediaries might derail its economic growth plans. And he has a point. Banks, facing a shortage of funds, are more discriminate about giving loans. And unless China sees a dramatic ballooning of exports for the rest of the year, it will see its first trade deficit in four years. Put simply, this means that even projects authorised by the central authorities or the state may not get all the funds they need. Which is a pity because China, unlike many developing countries, actually has a massive pool of domestic savings to draw on. Figures compiled by Crosby show that China's national savings amounted to about 36 per cent of its gross national product, the second-highest in Asia after Singapore's 50 per cent (not counting Japan). Mr Beardson estimated that private savings was comfortably over US$400 billion, forming one of the largest pools of domestic private capital. Unfortunately, the undeveloped capital market means that the funds are either untapped or inefficiently deployed. At present, there just aren't enough financial intermediaries and instruments for the eager Chinese investor to turn to. Some reasons for this have been identified: the weak regulatory environment; the small size of its capital markets; and the lack ofinformation. So, unless China moves quickly to reform its capital markets, the potential to be an economic giant will remain just that - potential.