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 certain SEC regulators and owners of heavily shorted stocks such as AIG (NYSE: AIG ) , Capital One (NYSE: COF ) , and Time Warner (NYSE: TWX ) may 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 ...
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's gotten so bad in China that the CSRC finally approved shorting at the end of September. To me, this indicates that the CSRC believed all optimism has 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 though Chinese stocks have rebounded from their lows, many are still available for lower multiples than we've seen previously. For example, fast-growing companies such as Fushi Copperweld (Nasdaq: FSIN ) and RINO International (Nasdaq: RINO ) are selling for less than 15 times earnings.
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. 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. 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.
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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.