China’s been up to a lot lately, and it may pay dividends for investors who play it right. The country’s move to lower interest rates to 5.6%, the signing of a climate pact with the U.S. and plans to stimulate its economy are actually just more tactical steps in a long-range plan to boost sagging growth as the country makes the transition to a consumer society.

Challenges abound, and China will be highly volatile in the short term. It has to address slow factory growth, a stalled property market, and a banking sector that’s increasingly burdened by bad loans.

We think this environment favors multinationals in the short-term over private Chinese businesses and state-owned enterprises. Given the current shakeout that’s happening by under performing private and state-owned businesses, it’s too soon to pick winners in those two categories.

In the long-term, all three business sectors—private, state-run and multinational—will benefit from the China-U.S. climate pact that will mean increases in energy investment. Clean tech infrastructure players such as General Electric (NYSE: GE) and home-grown Chinese renewable energy developers will get more business. China has pledged to build a national carbon market in 2016, which would put a price on carbon and motivate businesses to reduce their emissions.

Of course, some critics think the terms of the pact are so vague China will emit as much as it wants to. And given early Republican criticism over the climate deal, we’ll be watching closely to see whether the U.S.-China pact is blocked next year by the incoming Republican-controlled Congress.

China on the Upswing?

Source: Y Charts

The Big Picture

China’s recent moves are just the latest changes in a much bigger strategy, known as the Third Plenum. This is designed to open the country’s banking, energy and other key sectors to foreign investment, which represent the biggest expansion of China’s markets since liberalization began decades ago.

Will the Third Plenum pay off? Many investors are understandably hesitant to pile back into countries such as China, after emerging markets’ stomach churning, wild ride over the last two years. This was driven largely by the Chinese economy’s slowdown and fears that the nation was headed for a hard landing.

So investors in China need to stay in for the long haul and understand that the market will continue to develop, albeit in fits and starts. Patience is the key.

To capitalize on China’s new reforms, we advise investors to first look at Western multinationals with China operations because they are already doing business there and their stocks are fairly-priced and easy to trade.

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