An End to QE (Even if Temporary) Seems Perfectly Timed for China

Includes: CAF, CHL, CYB, FXI
by: Danny Furman

U.S. equity markets sold off sharply June 22 after Ben Bernanke made intentions clear that no form of QE3 would be assisting the economy in the immediate future. Days still remain before ongoing buying under QE2 persists, however stocks have shown weakness for nearly two months. Timely buying and news of a Greek debt resolution mitigated broad losses June 23. Still, an end to fiscal market stimulus leaves asset markets, public and private institutions, the millions of jobs they provide and consumer spending on shaky ground.

All may be alright, at best, assuming investment - aside from Fed operations - supports markets and "normalcy" returns. Still, recent unemployment, housing, consumer confidence and other data in the U.S. has confirmed low expectations for demand. The greatest exporter to within our busy borders is China. No QE3 most certainly means bad news for the wide manufacturing base there.

Or does it? Infrastructure spending by the PRC, along with public and private investment from all over the world has built new factories, housing, entertainment, roads and grids across the home to more than a billion people. Perhaps the Chinese manufacturing base can best target a domestic population growing in affluence. Dwindling demand from abroad, a strengthening domestic currency, and high energy prices are further reasons for China to sell to China.

The Shanghai Index followed Bernanke's press conference with a somewhat astounding intraday rally of over 2%. The following day it added another 2%. Prior to the June 24 open, Premier Wen Jiabao assured markets that price levels were expected to drop steadily from current levels, indicating further strengthening of Chinese holdings.

It seems an end to QE, even if only temporary, is timed perfectly for China. Newly built economic infrastructure there, and now strengthening U.S. dollar holdings, alongside the Yuan (NYSEARCA:CYB) strengthening even more on a global basis, have the PRC now sitting prettier than ever. Whether or not China's new growth engine will succeed is yet to be seen, however, no other market on the planet is better prepared for sustainable growth.

Investors can gain exposure to Chinese stock indexes, which currently trade near four-year lows, via ADR holding ETF FXI or Morgan Stanley China A Share Fund CAF, which invests in equities traded on Chinese exchanges. My top pick for an individual Chinese stock is China Mobile (NYSE:CHL), based on sector leadership, asset valuation and yield.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.