China Automotive Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese auto-component manufacturer China Automotive Systems (Nasdaq: CAAS  ) were headed in the wrong direction today, falling as much as 20% on heavier-than-average volume.

So what: For a small, publicly traded Chinese company, particularly a reverse-merger company, talking about anything having to do with accounting is akin to screaming "Fire!" in a crowded theater. Neither China MediaExpress (Nasdaq: CCME  ) nor China Agritech (Nasdaq: CAGC  ) have traded since Monday as the auditors of both companies walked away. This only added further fuel to the fire that's been raging lately as investors have become deeply suspicious of the accounting and transparency at small Chinese companies that trade on the U.S. markets.

Now what: As China Automotive was careful to point out and emphasize, the accounting issues that are forcing the company to delay its 10-K filing and restate past reports are related to convertible notes that were issued back in 2008, not operational issues. But investors don't really care about that right now. With fear cranked to nosebleed levels in that corner of the market, investors are selling now and asking questions later. In other words, today's sell-off may be an overreaction.

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