The Great Chinese Crash of 2008

Starting last fall, the Chinese stock markets went into a nosedive not unlike the Nasdaq plunge of 2000. Since their October highs, the Shanghai Composite (SSE) is down 52%, and the Hang Seng is down 28%.

Given the plight of the broad indexes, it's no surprise that many of the notable Chinese American depositary receipts have also plunged:

Company

Price Change, 10/31/07 to 6/23/08

FocusMedia (Nasdaq: FMCN  )

(58%)

Shanda Interactive (Nasdaq: SNDA  )

(28%)

Ctrip.com (Nasdaq: CTRP  )

(17%)

China Security and Surveillance (NYSE: CSR  )

(44%)

Noah Education (NYSE: NED  )

(68%)

Now think back to 2000, when the Nasdaq 100 lost 38% of its value -- with names like priceline.com (Nasdaq: PCLN  ) and EarthLink (Nasdaq: ELNK  ) getting cut in half (or worse). But as we recall, that wasn't the end of it -- the Nasdaq 100 would go on to lose an additional 58% through the end of 2002.

Oh no, not again ...
Chinese stocks were getting a bit frothy toward the tail end of last year, and were due for a correction like this -- the SSE did, after all, quadruple in value from October 2002 to October 2007. Taken together with a new strain of irrational exuberance infecting first-time investors in China, it meant that you had all the makings of a bubble in need of popping.

All it took was a Chinese version of the credit squeeze to start the sell-off. The reduction of available credit made it harder for growing companies to use leverage to expand their businesses, which called into question the lofty valuations given to high-growth Chinese companies.

But unlike many of the Nasdaq stocks that faltered in 2000, a good number of Chinese stocks have posted not only positive earnings, but strong earnings growth, too.

Suntech Power, for instance, beat the Street's latest quarterly earnings estimate by 18%, as it doubled profits year over year. Apparently that wasn't enough to satisfy investors -- Suntech Power shares remain nearly half off their 52-week highs.

Before you buy
I don't meant to suggest that it's time to indiscriminately purchase Chinese stocks. Far from it. But in the wake of this crash in Chinese stock prices, savvy investors should look for values, just as they would anywhere else.

To recall the words of Sir John Templeton, one of the world's pioneers in global investing:

It seems to be common sense that if you are going to search for those unusually good bargains, you wouldn't just search in Canada. If you just search in Canada, you will find some, or if you search just in the United States, you will find some. But why not search everywhere?

Chinese shares could continue to fall in 2008. But they won't do so without creating some values that may end up being some of the best stocks for the next 10 years. After all, even the dot-com crash left some values in its wake -- priceline.com is a 15-bagger since September 2002.

Advisor Bill Mann and the Motley Fool Global Gains team are keeping their eyes peeled for such deals in this turbulent global market. Despite down markets in most countries, Global Gains picks are outpacing the S&P 500 by three percentage points.

To see the full list of Global Gains picks, a free 30-day trial to the service is yours. Just click here to get started.

This article was originally published on April 7, 2008. It has been updated.

Todd Wenning seeks his fortune in stocks rather than in cookies. He does not own shares of any company mentioned. Ctrip.com is a Motley Fool Hidden Gems recommendation. Shanda Interactive Entertainment, Suntech Power, and Focus Media Holding are Rule Breakers picks. priceline.com is a Stock Advisor recommendation. The Fool's disclosure policy is as wise as the old owl.


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