The Great Chinese Crash of 2008

By Todd Wenning | More Articles
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Since October 2007, the Chinese stock markets have done a nosedive, making our S&P 500's drop of 36% over the same period dull in comparison. From their October highs, the Shanghai Composite (SSE) is down 71%, and the Hang Seng is down 55%.

Given the plight of the broad indexes, it's no surprise that many of the notable Chinese American depositary receipts have also struggled:

Company	% Change, 10/31/07 to 10/31/08
Trina Solar (NYSE: TSL  )	(82%)
ChinaFinance Online (Nasdaq: JRJC  )	(74%)
Yingli Green Energy (NYSE: YGE  )	(86%)
WuXiPharmaTech (NYSE: WX  )	(76%)
Cogo Group (Nasdaq: COGO  )	(75%)

Data from Yahoo! Finance.

Rewind a few years to 2000, when the Nasdaq lost 38% of its value -- with names like Level 3 Communications (Nasdaq: LVLT  ) and VeriSign (Nasdaq: VRSN  ) losing more than 80% in that year alone. But as we recall, that wasn't the end of it -- the Nasdaq 100 would go on to lose an additional 58% through the end of 2002.

Oh no, not again ...
Chinese stocks were getting a bit frothy toward the tail end of last year and were due for a correction like this -- the SSE did, after all, quadruple in value from October 2002 to October 2007. Taken together with a new strain of irrational exuberance infecting first-time investors in China, it meant that you had all the makings of a bubble in need of popping.

All it took was a Chinese version of the credit squeeze to start the sell-off. The reduction of available credit made it harder for growing companies to use leverage to expand their businesses, which called into question the lofty valuations given to high-growth Chinese companies.

But unlike many of the Nasdaq stocks that faltered in 2000, a good number of Chinese stocks have posted not only positive earnings, but strong earnings growth, too.

Suntech Power, for instance, beat the Street's latest quarterly earnings estimate by 19%, growing net income nearly 60% year over year. Apparently, that wasn't enough to satisfy investors -- Suntech Power shares remain more than 75% off their 52-week highs.

Before you buy
I don't meant to suggest that it's time to indiscriminately purchase Chinese stocks. Far from it. But in the wake of this crash in Chinese stock prices, savvy investors should look for values, just as they would anywhere else.

To recall the words of Sir John Templeton, one of the world's pioneers in global investing:

It seems to be common sense that if you are going to search for those unusually good bargains, you wouldn't just search in Canada. If you just search in Canada, you will find some, or if you search just in the United States, you will find some. But why not search everywhere?

Chinese shares could continue to fall for the rest of 2008. But they won't do so without creating some values that may end up being some of the best stocks for the next 10 years. After all, even the dot-com crash left some values in its wake -- Priceline.com is a six-bagger since September 2002.

And with other global markets on the slide, advisor Bill Mann and the Motley Fool Global Gains team are keeping their eyes peeled for big deals in this turbulent global market.

To see the full list of Global Gains picks, a free 30-day trial to the service is yours. Just click here to get started.

This article was originally published on April 7, 2008. It has been updated.

Todd Wenning  seeks his fortune in stocks rather than in cookies. He does not own shares of any company mentioned. Priceline.com is a Motley Fool Stock Advisor pick. Suntech Power and China Finance Online are Rule Breakers picks. The Fool's disclosure policy is as wise as the old owl.