Investment Strategies to Exploit Economic Growth in China

16 Pages Posted: 4 Nov 2010

See all articles by Burton G. Malkiel

Burton G. Malkiel

Princeton University - Bendheim Center for Finance; National Bureau of Economic Research (NBER)

Jianping Mei

New York University (NYU) - Department of Finance

Rui Yang

affiliation not provided to SSRN

Date Written: Winter 2005-2006

Abstract

Since the beginning of economic reforms two decades ago, the economy in China has produced real growth rates of between 8 percent and 10 percent per year. We believe that China will continue to experience exceptional growth for decades to come at rates well above those of any other large country in the world. In this paper we first show why China will enjoy growth rates of economic activity well above those in the developed world. But economic growth does not necessarily translate into high-security returns. Indeed, returns from investments in Chinese equities have been unattractive for the past decade, and corruption and corporate-governance issues, as well as a variety of restrictions, make direct investment in Chinese opportunities difficult. But we also will show that Chinese equities now are attractively priced relative to their earnings, their historical valuations, and their growth rates and that some risks have been attenuated over time. We then will proceed to examine the potential rewards and risks of the various indirect methods U.S. investors can use to access the Chinese market. For example, we will examine the lower-risk strategies of investing in companies not necessarily domiciled in China but that sell to or service Chinese consumers and producers and thus can profit from the rapid future growth of the Chinese economy. We conclude that a mixed strategy involving both direct and indirect methods of investing in China’s future is likely to provide the best risk/reward trade-off for investors.

JEL Classification: G10, G11, G15

Suggested Citation

Malkiel, Burton G. and Mei, Jianping and Yang, Rui, Investment Strategies to Exploit Economic Growth in China (Winter 2005-2006). Journal of Investment Consulting, Vol. 7, No. 3, pp. 32-47, Winter 2005-2006. Available at SSRN: https://ssrn.com/abstract=1702374

Burton G. Malkiel (Contact Author)

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States
609-258-6445 (Phone)
609-258-0771 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jianping Mei

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

Rui Yang

affiliation not provided to SSRN ( email )

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