Why Chinese Stocks Tanked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese stocks were getting dumped today following the Shanghai Composite's 5.3% plunge last night. Among those feeling the pain were YY (NASDAQ: YY  ) , Dangdang (NYSE: DANG  ) , Trina Solar (NYSE: TSL  ) , Giant Interactive (UNKNOWN: GA.DL  ) , and LDK Solar (NASDAQOTH: LDKSY  ) , all of which were down by 10% or more at one point today.

So what: A credit crisis is spooking China as interbank lending rates jumped to more than 13% last week, essentially bringing borrowing to a halt. As the drop in the Shanghai Index indicates, Chinese companies are down across the board, but the credit crunch seems to have been encouraged by the government, which has chosen not to intervene in the cash crunch, in order to punish speculators and establish a stable market.

Now what: Interest rates actually eased on Friday and today, hitting 6.5%, but the country's central bank today placed the fault on lenders, saying they are not managing their loans properly and that there is plenty of cash available. The central bank has been trying reduce the country's dependency on borrowing. China has long been attacked by analysts who claim that the Chinese economy is a bubble, a theory that the current development would support. While the crisis appears to be cooling with interest rates now falling, today's events are a reminder that investors may want to do some extra homework before investing their own money into the state capitalist country as the situation provides added risk.

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