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Chinese Stocks: Bargain Basement or Trap Door for Investors?

TAIPEI ( TheStreet) -- A "reform" in China is Communist-speak for government-driven change in any system where something is so wrong that commoners dare to complain in a country unfriendly to free speech.

If there was ever a clear candidate for reforms, it's mainland China's stock markets. But reforms have been made, and problems persist. And they're spilling into the shares of Chinese firms traded on the more mature, more respected exchange in Hong Kong.

It's hard to know which numbers to pull from the deep cave of bear-run statistics for the 22-year-old A-shares in Shanghai and Shenzhen, the country's top financial centers.

The most timely is the Shanghai exchange's three-year low in the final week of August, after major Chinese firms such as Air China (601111.SS, 0753.HK) and FAW Car Co. (000800.SZ) reported financial setbacks in the first half of the year.

Current-year slack in China's mythological economic growth of around 9% to 10% a year over the past decade has hurt some of these iconic firms. Second-quarter growth was 7.6%, and the official full-year 2012 forecast is for 7.5%.

That's exactly where reforms are still lacking: getting Chinese companies back onto the fast growth track that previously inspired investor confidence.

Yet people are still trading stocks. They have experience and a dark sense of humor.

The Shanghai Composite Index was trading around 2,040 points this week. The index never recovered from a massive drop during the global financial crisis, when it hit a low of 1,747 points, down from more than 5,000 in late 2007. The Shenzhen Composite Index stood at around 845 this week, again well below pre-financial crisis levels. It touched a five-year low of 467.35 in November 2008.

China's bourses have faced particular emerging-exchange pressures, such as patchy regulations, spotty transparency at listed companies, and a perceived lack of value for minority shareholders. A class-action lawsuit last year against Chinese calcium carbonate maker ShengdaTech (SDTH) over financial reporting issues highlighted some of these issues.

Keen to keep investors at least hopeful, officials in Beijing have pursued reforms such as a loosening of monetary policy while inflation eases and economic growth slows. In May, the country's central bank announced it would reduce by half a percentage point the share of deposits that commercial banks must keep in reserve -- meaning more money would be left for loans.
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