It didn't happen exactly as I had predicted, but it has finally happened. And it means that the world's fastest-growing stocks are available for cheap.
Before I get to the whos, whys, and wheres, though, let me tell you who we have to thank.
Here comes the cabal
Although owners of heavily shorted stocks such as Sirius XM (Nasdaq: SIRI ) , Motorola (NYSE: MOT ) , and Advanced Micro Devices (NYSE: AMD ) will disagree with me, short sellers are crucial to healthy markets.
By making the case for stocks to fall, 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 didn't tread
Optimism, however, had been the defining characteristic of Chinese markets until 2008. Chinese stocks gained 130% in 2006, and another 97% in 2007. 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.
Of course, there was nothing to stop them.
See, you couldn't short stocks in China. Without investors scouring the market for weaknesses, those same housewives, cab drivers, and fishmongers have been treated to nothing but good news. That made them overconfident, overzealous, and now overexposed to an unquestionably richly valued basket of stocks.
It won't be that way for long ...
And China's Security Regulatory Commission -- fearing a stock market crash -- was reluctant to stop them. That's why the country held off for so long on allowing investors to short stocks.
But it got so bad in China last year that the CSRC finally approved shorting at the end of September. What this indicates to me is that it believed all optimism had been purged from the marketplace. When that happens, we've reached the point of maximum pessimism -- the precise time that master international investor Sir John Templeton would have told you to invest.
And you should consider that. Because even though the Chinese stock market has started rebounding this year, Chinese stocks trading here in the States remain available for lower multiples than we've seen in years. In fact, the average P/E multiple for Chinese stocks listed on the major U.S. exchanges is today a mere 11.1, with fast-growing companies such as China Biotics (Nasdaq: CHBT ) , WuXi Pharmatech (NYSE: WX ) , and Yucheng Technologies (Nasdaq: YTEC ) all trading for less than 10.
Get ready to buy
That's why you should be licking your chops.
China's rapid economic growth will be the global economic story of the next 10 to 20 years, and our Motley Fool Global Gains international investing team recently returned from a research trip to the country where we tried to separate the best opportunities from the pretenders. The good news: We found some great companies.
That does not mean, however, that we'd be willing to pay any price to own them. Today, however, thanks to the decline in the Chinese market, we're looking hard at a long list of Chinese stocks. To see what we're recommending, click here to try Global Gains free for 30 days. There is no obligation to subscribe.
This article was first published on Aug. 20, 2007. It has been updated.
Tim Hanson is co-advisor of Global Gains. He does not own shares of any company mentioned. The Fool's disclosure policy likes basketball.