China faces teething issues as it tries to reform economy

Last Thursday’s WSJ article highlights the challenges faced by the Chinese government as they embark on a program of market-friendly reforms. These reforms ranging from developing an active and healthy equity market, to a market-determined Yuan exchange rate, should help make China an attractive investment proposition in the long-term. The government is in uncharted territory here, with the scale of reforms that they are undertaking. There will definitely be missteps as witnessed by the volatility in the equity markets and the botched move towards a market-determined Yuan exchange rate.

However, we think that as long as the government continues down the path of reforms, investors should use the market volatility to look for attractive entry points. In a reform-led environment, state owned enterprises (SOEs) represent one of the greatest value propositions for long-term investors. We continue to believe that in the long-term, valuation discounts that exist between Chinese SOEs and their Western equivalents should narrow over time, and in the meantime the Chinese SOEs generate income for investors by paying out a healthy dividend yield.

For more information on this subject, please visit the Wall Street Journal article. By clicking on this link, you will be leaving the New Vernon Wealth Management website.