and ETFs scaled new heights after the government announced
sweeping financial and legal reforms in hopes of supercharging
the already rapidly growing economy.
are cheering the end of the one-child policy, pledges of more
free-trade zones and increased access to public services, among
many other improvements.
"The reform initiatives (despite some shortcomings) are rather
comprehensive, and being a positive surprise to the market, it
should be seen as a positive factor to China's long-term growth
and financial stability outlook," Credit Suisse analysts wrote in
a strategy report released Monday. "Near-term growth also showed
signs of stabilization, which should be seen as positive to the
Analysts at Investazor.com, a trading news and analysis
website, recommends holding Chinese stocks over the next three to
six months. They reason that investors will opt for China over
U.S. and European stocks because the Federal Reserve will have to
taper its easy-money policies and the recent eurozone
interest-rate cut may be insufficient in helping the economic
"It's such a big economy that influences consumption around
the world, any new economic policy can influence and push the
market into high volatility," Andrei Costescu, CEO of
London-based Investazor.com, said in an email.
Among more than 30 ETFs offering exposure to the world's
second-largest economy,iShares China Large-Cap (
) is the largest by assets. It's rallied 8% since Friday, when
details of China's plan emerged.
FXI has returned about 1% after rallying from a 22% decline at
midyear.IShares MSCI Emerging Markets Index (
) is down about 3% this year, whileiShares MSCI EAFE Index (
), tracking developed foreign markets, is up 19%.
FXI holds only 26 stocks, with financials accounting for 56%
of assets, telecom 16% and energy 12%.
Stocks in FXI trade at a cheap price-earnings ratio of 9 and
price-to-book value of 1.4, and have a dividend yield of 3.6%,
according to ETF Research Center. By contrast, EEM trades at
nearly 12 times earnings, a P/B of 1.5 and yields 2.7%. EFA
sports a P/E of nearly 15, a P/B of 1.6 and yields 2.9%.
Schwab investment strategists issued a neutral rating on
China, saying that low valuations and bearish investor sentiment
(a contrarian indicator) were tempered by economic data that fail
to confirm the government's claims of recovery.
"Commodity prices are soft, despite the economic strengthening
in the third quarter being led by infrastructure and property
spending, and recent announcements of increased spending on
railway construction and reconstruction of shantytowns," Schwab
wrote in a report Friday. "Defensive sectors of the stock market
are leading, and property stocks are lagging, indicating Chinese
stocks could fall further."
The risks of investing in China remain very high as the
results of the reforms may not be seen for months, or even years.
They also face tremendous resistance from interest groups.
"This breathless zeal is premature and stocks will fall,
hopefully not in a hard landing," Usha Haley, a China expert and
professor at West Virginia University, said in an email. "The
hard part in China is not drafting but implementing the
For example, China has the world's most stringent laws on
intellectual property rights, but it's the world's greatest