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China may have celebrated its Ghost Month from Aug 7 – Sep 4, a period when ghosts are believed to emerge from the lower realm, but of late some evils seem to have spared the economy. The Chinese economy enjoyed some positive and encouraging data across the spectrum.  

As global markets are gradually stabilizing from the Federal Reserve’s zero-taper shocker, the Chinese economy seems to be well poised to grow at a moderate pace as the government push through the structural changes for a holistic long-term self-sustaining growth.

Meanwhile, as global equity markets are continuing to move north upon the zero-taper landscape, let's cherry pick some must-have Chinese stocks with strong fundamentals. However, before we zero-in on a handful of priceless stocks, let us recap the various turns of events over the past month.

The Positive Feelers

Export and manufacturing sectors are the two key pillars in the Chinese economy. August data revealed that exports in China rose 7.2% year over year and imports increased 7%; thus resulting in a trade surplus of more than $28.5 billion. Factory output growth hit a 17-month high of 10.4% in August compared with the year-ago period – the biggest such increase since Mar 2012.

The Purchasing Managers' Index (PMI) reading climbed to 51 in August from 50.3 in July. The PMI is one of the key metrics to gauge economic health (a reading above 50 indicates an expansion).

Retail sales were up 13.4% in August – the fastest growth reported in 2013, while fixed asset investment inched up to 20.3% in the first eight months of the year. Consumer inflation was down marginally from 2.7% in July to 2.6% in August, which is well below the official government upper limit of 3.5%.

According to the China Association of Auto Manufacturers, auto sales aggregated 1.35 million in August, up 11% year over year. This is encouraging news for automobile majors like General Motors Company (GM - Free Report) , Ford Motor Co. (F - Free Report) and Honda Motor Co., Ltd. (HMC - Free Report) as China is reportedly the world’s biggest auto market.

Rebalancing the Economy

A steady increase in imports signifies a shift in government strategy to stop being over-dependent on exports and hint at a structural rebalancing of the economy. In order to spur domestic consumption due to a slowdown in external demand as the commodity super-cycle moderates, the government has also taken some modest steps. These include suspension of value-added tax and turnover tax for small businesses, which have monthly sales of less than 20,000 Yuan ($3,257). This is likely to benefit over six million small companies and boost employment, thereby boosting domestic demand.     

In addition, the government has introduced new rules to curb the misuse of public funds and has quickened railway investments and public housing construction policies to instill more confidence. Central bank figures further proved the surging customer confidence as new bank loans aggregate 711.3 billion Yuan ($116.2 billion) in August. Total social financing aggregate, which is a broad measure of liquidity, also increased almost two-fold to 1.57 trillion Yuan in August from 808.8 billion Yuan the month before.

All these steps have paved the way for the economy to rise, albeit at a moderate pace, and allayed fears that the second largest economy is running out of steam. Although China's GDP has been staying under 8% for five straight quarters -- and a 7.5% growth projection for 2013 would mark the lowest rate of expansion in more than two decades -- it justifies the structural reforms of the government for long-term sustainable growth that is not overtly dependent on external factors.

3 Top Chinese Stocks

Amid such encouraging data, Chinese stocks rose to a three-month high. The stocks also benefited from the deferral of the tapering program, as emerging economies have largely been the beneficiaries of Fed’s largesse over the years. Cash pumped into the emerging markets through the stimulus program in the U.S. were primarily utilized to plug funding deficits and used for infrastructure projects to fuel further growth.

As the equity market continue to reap the benefits of the Fed decision, there are certain Chinese stocks with attractive valuation metrics backed by a solid Zacks Rank #1 (Strong Buy). Let’s take a closer look at these companies that appear to be well positioned to perform relatively better in the short-term.

ATA, Inc. : Headquartered in Shanghai, ATA provides computer-based testing services that are used for professional licensure and certification tests. The company also provides logistical services such as test registration, scheduling and fee collection. The stock is trading at a forward P/E of 17.92x and has a long-term earnings expectation of 15.00%.

SouFun Holdings Ltd. (SFUN - Free Report) : The company trades at a forward P/E of 18.22x and has a long-term earnings expectation of 39.81%. SouFun operates a real estate Internet portal, and a home furnishing and improvement website in the People’s Republic of China.

Semiconductor Manufacturing International Corp. (SMI - Free Report) : Headquartered in Shanghai, the company engages in computer-aided designing, manufacturing, testing, packaging and trading integrated circuits (ICs) and other semiconductor services. It is also involved in the designing and manufacturing of semiconductor masks. The stock is trading at a forward P/E of 12.89x and has a long-term earnings expectation of 15.00%.

Such strong fundamentals signify that this is perhaps the most opportune time to own these high-potential stocks that pledge a healthy ROI.

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