Investors may anticipate a new phase of growth in China as a result of a
comprehensive reform plan designed to restructure the country by 2020,
according to a whitepaper published by Charles Schwab this week. The
whitepaper, titled “Why
New Reforms Make Chinese Stocks Attractive,” examines the potential
for the Chinese government’s reform plans to create both higher quality
and more sustainable growth in the country, reducing some uncertainty
for investors. The main driver for optimism in China, according to
Schwab, is the potential positive impact the reforms could have on both
the financial sector and consumer spending.
The whitepaper is published as a Q&A with Michelle Gibley, Director of
International Research with Schwab Center for Financial Research, a
division of Charles Schwab & Co., Inc. Schwab Center for Financial
Research provides investors and independent advisors with Schwab’s point
of view on a wide range of market, economic, investing, and financial
planning insights and strategies.
According to Gibley, “China could be a ray of light amid the current
emerging market turmoil. Over the long term, we see potential for
Chinese stocks to outperform stocks in other emerging markets as China’s
economic reforms begin to take hold.”
Key points in the whitepaper include:
-
The next phase of growth in China might be characterized by slower,
yet higher quality and more sustainable growth, even if only a portion
of the reforms are actually implemented.
-
The impact of China’s reforms on the financial sector could be
significant. Reforms could open up new business opportunities for
banks and improve the health of local government loans.
-
Consumer spending could also see a boost from reforms to rural land
rights, the household registration system and modification of China’s
one-child policy, which may result in putting more money in the hands
of consumers, increasing mobility of the labor force and potentially
lifting consumption, respectively.
-
Chinese stock valuations could rise as a result of higher quality
growth amid negative investor sentiment toward emerging markets,
creating an opportunity for risk-tolerant equity investors to take
advantage of buying opportunities.
-
There could be significant risks in China in the near-term, including
increased volatility and uncertainty about the pace of growth and
reform momentum as China’s policy makers balance the reforms with
economic stability.
The whitepaper notes that investors may consider keeping emerging market
equity exposure equal to their long-term strategic allocation, while
overweighting China within the emerging market equity allocation with a
focus on mutual funds and exchange-traded funds (ETFs) that invest in
large-cap Chinese stocks.
“We see potential for risk-tolerant investors to ride out what could be
significant volatility over the short term in China in order to take
advantage of buying opportunities,” Gibley noted in the whitepaper.
According to Schwab Center for Financial Research, the key economic
reforms in China that investors should watch are:
-
Reforms to rural land rights which will allow farmers to transfer and
leverage land as collateral,
-
Changes to household registration that could extend access to public
services such as health care and primary education to millions of
migrants,
-
Loosening of the one-child policy which could increase consumer
spending and improve sentiment,
-
Fiscal reform at the local government level designed to create better
transparency and improve the financial health of local governments,
-
State-owned enterprises shifting to a more market-based environment
focused on efficiency and return on investment while the government
seeks to avoid job losses, and
-
A series of reforms designed to make various aspects of the financial
system more market-based.
The full whitepaper, part of Schwab’s Investing Ideas series, is
available here.
Schwab Investing Ideas offer thoughtful analyses of key market trends
and investing opportunities for investors. More information, including
other recently published insights, can be found on Schwab’s
Investing Ideas page.
About Charles Schwab
At Charles Schwab, we believe in the power of investing to help
individuals create a better tomorrow. We have a history of challenging
the status quo in our industry, innovating in ways that benefit
investors and the advisors and employers who serve them, and championing
our clients’ goals with passion and integrity.
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Disclosures
Investors should consider carefully information contained in the
prospectus, including investment objectives, risks, charges and
expenses. You can request a prospectus by visiting Schwab.com or
calling Schwab at 800-435-4000. Please read the prospectus carefully
before investing.
Investment returns will fluctuate and are subject to market volatility,
so that an investor's shares, when redeemed or sold, may be worth more
or less than their original cost. Unlike mutual funds, shares of ETFs
are not individually redeemable directly with the ETF. Shares are bought
and sold at market price, which may be higher or lower than the net
asset value (NAV).
International investments involve additional risks, which include
differences in financial accounting standards, currency fluctuations,
geopolitical risk, foreign taxes and regulations, and the potential for
illiquid markets. Investing in emerging markets may accentuate these
risks.
Past performance is no guarantee of future results. Sections of this
article contain forward-looking statements which reflect the author’s
best judgment based on factors currently known but involve significant
risks and uncertainties.
The information provided here is for general informational purposes only
and should not be considered an individualized recommendation or
personalized investment advice. The investment strategies mentioned here
may not be suitable for everyone. Each investor needs to review an
investment strategy for his or her own particular situation before
making any investment decision.
All expressions of opinion are subject to change without notice in
reaction to shifting market, economic or geopolitical conditions. Data
contained herein from third-party providers are obtained from what are
considered reliable sources. However, accuracy, completeness or
reliability cannot be guaranteed.
Through its operating subsidiaries, The Charles Schwab Corporation
(NYSE: SCHW) provides a full range of securities brokerage, banking,
money management and financial advisory services to individual investors
and independent investment advisors. Its broker-dealer subsidiary,
Charles Schwab & Co., Inc. (member SIPC,
www.sipc.org),
and affiliates offer a complete range of investment services and
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Bank (member FDIC and an Equal Housing Lender), provides banking and
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Schwab Center for Financial Research is a division of Charles Schwab &
Co., Inc.
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