They don't know when, exactly, but millions of investors are worried they're about to get wiped out. For you, this is good news. If their worries are on target, we're about to be able to buy the world's fastest-growing stocks for cheap.
Before I get to the whos, whys, and wheres, though, let me tell you whom we have to thank ...
Here comes the cabal
Although owners of heavily shorted stocks -- such as AIG (NYSE: AIG ) , Capital One (NYSE: COF ) , and Hudson City Bancorp (Nasdaq: HCBK ) -- and apparently now the SEC may disagree with me, short-sellers are crucial to healthy markets.
By making the case for stocks to go down, short-sellers make the market more efficient. Shorts temper excessive optimism, helping us all avoid the protracted painful corrections that are its consequence.
Where shorts don't tread
Optimism, however, was the defining characteristic of Chinese markets until this year. Chinese stocks gained 130% in 2006, and finished 2007 up 97%. As a result, money moved into the Chinese markets at a remarkable clip, and stories abounded about Chinese housewives, cab drivers, and fishmongers speculating in the market.
That inability to check speculation by uninformed investors prompted China's Security Regulatory Commission to consider launching stock index futures contracts, which would allow investors to bet against Chinese stocks. Those plans, however, have been put on hold given that China's stock market is down a painful 50% since last fall, but they are still in the works and will put additional shockwaves through the Chinese market when enacted.
This is a good thing
See, since you can't short stocks in China, there's no one scouring the market for weakness. But granting investors the ability to go short will ultimately make the Chinese markets stronger, healthier, and more transparent.
And while it's a better solution than the status quo, it is not a perfect solution. Because investors can only bet against a basket of China's 300 largest stocks, company-specific research will fall short. You would not have done as well shorting the S&P 500 over the past year (when it was down 10.5%) as you would have done shorting components such as Motorola (NYSE: MOT ) , Morgan Stanley (NYSE: MS ) , and Tellabs (Nasdaq: TLAB ) that were down even more.
The Chinese government's move is a step in the right direction, though ... and when it comes to pass, already frightened novice Chinese investors may sell the market's stocks down to dirt cheap levels.
Start licking your chops
China's rapid economic growth will be the global economic story of the next 10 to 20 years. The opportunities are huge, and the country is growing richer by the day. In fact, our Motley Fool Global Gains international investing team recently returned from a research trip to China, where we were almost universally impressed by the companies we met with and the growth trajectories they displayed.
That does not mean, however, that we'd be willing to pay any price to own them.
The big bounce
We're crossing our fingers at Global Gains that the introduction of shorting to China will cause widespread panic. Buying quality companies when others are indiscriminately selling is precisely the formula for making a lot of money over the long run.
We've also recommended a couple of Chinese companies that we think are compelling values already, and we're ready to double down on additional weakness.
If you'd like to learn more about the companies we're recommending, and the companies that make our wish list, click here to try Global Gains free for 30 days. There is no obligation to subscribe.
This article was first published Aug. 20, 2007. It has been updated.