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Why New Reforms Make Chinese Stocks Attractive - Michelle Gibley, Director of International Research, Charles Schwab

Why New Reforms Make Chinese Stocks Attractive - Michelle Gibley, Director of International Research, Charles Schwab

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Published by djbases
Michelle Gibley published a white paper on why Chinese reforms lead her to believe there are attractive investments now in large-cap stocks in China.
Michelle Gibley published a white paper on why Chinese reforms lead her to believe there are attractive investments now in large-cap stocks in China.

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Published by: djbases on Feb 06, 2014
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02/08/2014

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Why New Reforms Make Chinese Stocks Attractive
 A white paper by Michelle Gibley, Director of International Research
Schwab Center for Financial Research
 
2
Investors should look past the slower rate of economic growth in China and focus more on the potential for an
improvement in the quality of growth, which could benet
Chinese stock prices. In late 2013, the Chinese government outlined an ambitious reform plan in an attempt to overhaul its economy. These reform plans could create the next phase of growth in China and have a positive impact on Chinese stocks even before they are enacted. Valuations of Chinese stocks could rise—both because higher-quality growth typically commands a higher valuation and because investor sentiment is quite negative on China. In this wide-ranging conversation, Michelle Gibley shares her views.
Michelle Gibley 
 CFA, Director of International Research, Schwab Center for Financial ResearchMichelle Gibley conducts stock market research and analysis, specializing in international markets. She is co-author of the Schwab Market Perspective and writes monthly articles on Schwab.com covering
specic international topics. Gibley is a
member of the Schwab Investment Strategy Council.
 
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Executive Summary China’s comprehensive reform plan could create higher-quality, more sustainable growth, reducing uncertainty for investors. The main drivers for
optimism are the potential impacts on the nancial sector and consumer
spending.
Financials could experience improved prots and a reduced risk prole,
despite concerns to the contrary. The reforms could open up new business
opportunities for banks and shore up the health of local government borrowers, a key client.
Consumer spending might receive a boost. The reforms to rural land rights and the household registration system could improve incomes as well as propel the next stage of urbanization and productivity gains in China.  Additionally, the loosening of the one-child policy could provide a minor lift  to consumption.
Chinese stocks currently trade at a signicant valuation discount to both  their historical average and the broader emerging market equity universe.
Patient investors who can endure volatility can use periods of uncertainty as potential buying opportunities.
We believe risk-tolerant investors should overweight China’s stock market within their allocation to emerging market stocks. We advise that investors
consider mutual funds and exchange traded funds (ETFs) that invest in large-
capitalization Chinese stocks, which could benet over the next year or so
because of their discounted valuations.

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