SHANGHAI—Sentiment on China among global investors has always veered between exaggerated optimism and excessive pessimism.

Even so, the latest bout of gloom is unusually severe. The economic slowdown doesn’t properly explain it. Although the official 6.9% growth last year was the slowest in a quarter century—and many economists believe the real number is more like 6%--China is still expanding faster than almost any other major economy. Banks are flush with savings. The government retains plenty of financial firepower. Unemployment...