- 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.
“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.
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