NEW YORK (TheStreet) -- The past few months have seen a perfect storm in China. Externally, the whole world was slowing down, the eurozone was facing looming disaster, industrial metals and coal prices were in free fall just as stockpiling in China reached the height, and MuddyWaters picked the perfect time to expose the rampant fraud and mismanagement among Chinese public companies.Internally, inflation was sizzling, social discontent against economic polarization and corruption was boiling, labor cost was rising, real estate and credit bubbles were busting, power transition was running into unexpected troubles and various interest groups (both political and economic types) took advantage of the paralysis to speak up. It was not exactly chaos yet, but it sure looked close. But things have changed dramatically over the past week. The Outright Monetary Transactions announced by the European Central Bank and especially QE3 by the Fed have substantially lessened the tail risk in global economy over the short term. Of course, neither solves the problem, and the latter carries enormous longer term risk but that's for another day. QE3 will no doubt increase the inflation pressure in China, making it much trickier for the central government to strike the balance of stopping the real estate and credit bubbles and preventing free-fall, amidst the tangled battle against local governments and various powerful interest groups. But it helps, lessening a much deeper problem: overcapacity in virtually all sectors of manufacturing. As long as the export machine gets chugging along again, it buys precious time to deal with all other issues. The vacuum and rumor mill one month before the big meeting formalizing the once-a-decade power transition also came to an end last week as the anointed new leader, XI Jinping, surfaced after weeks of sudden disappearance from media. There are definite signs of his opponents, primarily Bo Xilai who recently lost his bid in a very public and scandalous fashion, are stilling fighting. For example, suspicion that the recent waves of anti-Japanese demonstrations across 40-plus cities in China have Bo's hand behind the scenes seems quite reasonable. This has desperation written all over it. The best the opponents can hope for at this stage is to gain a bargaining chip or two; the worst is that they overplay their hand and get wiped out for rocking the boat for everyone in power.
It's quite refreshing to see such power play getting to the street level; unfortunately the way it's played is unlikely to benefit anyone. Because of the late-stage fights, Beijing has been in paralysis over the past month or so. Mixed messages and confusions everywhere. This will likely come to an end as the party and state machines get back into gear. I expect more coherent policy responses to emerge on capital flight, real estate bubble, overgrowth of the financial sector, corruption, stimulus and perhaps even much-needed deeper reforms such as rebalancing between state-owned mega-corporations and private enterprises. Last week the Peoples' Bank of China even stopped injecting liquidity via repo operations, which had been their primary means of monetary intervention for months, and removed liquidity via reverse repos. This is an impressive and quick response to the changing climate after OMT and QE3. Furthermore, there's a more fundamental reason for my bullish view on China, over a longer time horizon. The cause of Chinese economic difficulties is very different from those in the developed world, which include high debt and baby boomer generation retiring. China's slowdown is caused by low efficiency (in both economy and governing) and overcapacity, as a result of years of rapid growth. As pain sets in, the motivation for increasing efficiency builds. This is contrary to the developed world where efficiency is already quite high; the only way to increase it further is through massive innovation, which is the best thing in the long run but does not come in ambulances. Stockpiling of raw materials will turn into an advantage if/when global economy finds its footing, if only temporarily. Steel mills and ship builders may have over-stretched for the next 10 years or more; but some sectors, such as solar, infrastructure (subways, high-speed rails), aerospace and agriculture, may be able to thrive eventually because they make sense for China and the government has pledged support. Another factor is the exchange rate. The Chinese Yuan went through a sudden change of fortune earlier this year, devaluing against USD after years of relentless rise. In retrospect, one major factor was clearly capital outflow, both speculative hot money and strategic Foreign Direct Investment. As the political situation in China and global economy stabilize, capital flow will likely reverse and the upward pressure in CNY will likely resume. The Chinese stock market, capital market and Chinese stocks trading in the U.S. have all taken a huge beating over the past few months. If/when they rebound, they are likely to be among the strongest, for the reasons I mentioned above. Gold, e.g. via the PowerShares DB Gold Trust ETF ( GLD), is the safest and purest QE3 play. China, e.g. via the iShares FTSE/Xinhua China 25 Index ETF ( FXI), is the best speculative play at this point. How long will it last, I do not know. We live on day at a time. At the time of publication, the author was long gold and FXI. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.