China Gets a 5-Sigma Spanking

China lately has been so good it's bad -- and when you're bad, a reprimand may be in order. On Tuesday, Chinese investors gave stocks a big "whoa, Nelly!" Investors were reacting to a combination of things, including the Chinese government tightening the country's money supply again by increasing required bank reserves. One source also cited rumors that China would impose a capital gains tax.

Many investors (or should I say traders?) may have been sitting on pins and needles waiting for an excuse to sell, since the Chinese markets have had such a blistering run lately. As my Foolish colleagues pointed out, the Shanghai Stock Exchange index was up 134% year over year prior to the drop, and it had run 68% over the past six months. Sitting on gains like that, it's little wonder people were rushing to lock in profits.

Even though China's indices have been far more volatile than our ol' faithful Dow, S&P, and Nasdaq, the drop was a biggie. The Shanghai index has seen eight days so far this year with a single-day movement of more than 3% -- the two largest were a 4.7% gain on Jan. 15 and a 4.9% drop on Jan. 31. Comparatively, the biggest move for the Dow in 2007 prior to today didn't break the 1% barrier, and the Nasdaq's biggest single day prior to today was a drop of 1.5% on Jan. 18. If you have followed my ongoing 5-Sigma series, China's 8.8% drop did qualify for the 5-sigma title.

Trina Solar, Canadian Solar (Nasdaq: CSIQ  ) (which is actually based in China), China Yuchai (NYSE: CYD  ) , and China Eastern Airline (NYSE: CEA  ) were among the hardest-hit China-based stocks. U.S. investment banking giants also saw some pressure from the China sell-off, as many of them have been pushing further into China to capitalize on the country's growth. Goldman Sachs (NYSE: GS  ) and Lehman Brothers (NYSE: LEH  ) were both off more than 4%.

Though China is unlikely to match the growth it had last year, the country's economy is still expected to put up double digits this year. That suggests that investing in Chinese companies will still yield excellent results. But it's buyer beware when working with stocks in China, as a heavy dose of the unexpected is standard fare in this Asian dish.

For a quick look at a number of Chinese stocks, check out the China tag in The Motley Fool's CAPS investing service.

Fool contributor Matt Koppenheffer owns shares of Goldman Sachs. The Fool's disclosure policy is here for you to confide in when that nasty Chinese stock market does mean things. You can visit Matt's blog here.


Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 522757, ~/Articles/ArticleHandler.aspx, 9/19/2014 2:05:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement