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 cheaper now than before.
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 popularly shorted stocks such as Gannett (NYSE: GCI), Ambac (NYSE: ABK), and Las Vegas Sands (NYSE: LVS) 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 and help 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 these markets at a remarkable clip, and stories abounded about Chinese housewives, cabdrivers, 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, cabdrivers, and fishmongers have been treated to nothing but good news. That made them overconfident, overzealous, and then 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 had become so bad in China last year that the CSRC finally approved shorting at the end of September. To me, this indicates that the CSRC 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 with the market recovery, some pockets of opportunity remain in that fast-growing market. Names such as A-Power Energy (Nasdaq: APWR), WuXi PharmaTech (NYSE: WX), and Jinpan International (Nasdaq: JST) still haven't fully recovered.
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 met with executives at various companies and were generally impressed with how these folks ran their 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.
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This article was first published on Aug. 20, 2007. It has been updated.
Tim Hanson
is the co-advisor of Global Gains. He does not own any stocks mentioned. Jinpan is a Motley Fool Hidden Gems pick. The Fool's disclosure policy enjoys Mongolian throat singing.
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