In honor of the Chinese Lunar New Year on Thursday, it seems only appropriate to review the country's investing prospects for 2008. Early last year, I urged investors to stay long Chinese stocks through 2007. Whether I was Foolishly lucky in my call or there was method to my madness is a matter of opinion, but the Shanghai benchmark nearly doubled while Motley Fool recommendations such as China Telecom (NYSE: CHA) and Focus Media (Nasdaq: FMCN) soared by more than 60%.  

Of course, there are no promises that Chinese equities will repeat such a feat in 2008. But I view the recent savage sell-off in Chinese stocks -- the Shanghai index has fallen more than 13% since the beginning of the year -- as a buying opportunity.

Here's to the Year of the Rat
Simply put, the outlook for domestically focused Chinese stocks in 2008 remains bright thanks to the continued strength of the Chinese economy, robust earnings growth at Chinese companies, and the continued appreciation of the yuan. Furthermore, U.S. recessionary fears have caused panicked selling in global markets, causing many Chinese companies to fall from their previous high valuations.

China Life Insurance (NYSE: LFC) and Motley Fool Global Gains recommendation New Oriental Education & Technology (NYSE: EDU) have both plummeted more than 20% since the beginning of 2008. Shanda Interactive (Nasdaq: SNDA) has dumped 17% of its value year to date. These are all pure plays on China's domestic market and are finally selling at more justifiable prices in comparison to their growth potential.

Let's take a quick look and make sure that I haven't lost my Foolish mind.

Economic prospects
All right, it's true that the Chinese economy is likely to cool in 2008, but it's not like the world's fastest-growing economy is going to fall off a cliff. According to a recent report from China's State Information Center, the country's economy is expected to grow at 10.8% in 2008. That's down only slightly from the 11.4% recorded in 2007.

A slowdown in export growth and real estate investment is expected to be offset by high domestic consumption, spurred on by central government initiatives like higher pension payments to retirees, a raised personal income tax threshold, and increased subsidies to farmers.

Earnings growth
To say that Chinese companies have been thriving is a bit of an understatement. According to Shanghai Securities News, combined profits for the 1,519 companies listed on the Shanghai Exchange were $76 billion for the nine months ended Sept. 30, 2007, up a whopping 67% over the prior year's period.

Domestically oriented firms should continue to rack up the gains as China's rapidly expanding middle class continues to spend freely. Let's not lose track of the fact that, according to a recent report from the McKinsey Global Institute, more than 76% of the Chinese population will be middle-class by 2025, up from 23% in 2006.

The yuan
Undoubtedly, the yuan will continue to appreciate throughout 2008. The Chinese government is acknowledging the need to tackle the inflation problem to which rising commodity prices and a weaker dollar have contributed. Indeed, a spokesman for the Chinese Central Bank recently said, "Yuan appreciation would help ease inflationary pressure." Most analysts are now pegging the yuan to appreciate at least 10% this year, which would provide a nice boost to earnings reported in dollars.

Kung hei fat choi
All in all, I believe that Chinese stocks will have a good run in 2008. That's not to say that there won't be gut-wrenching moments when investors feel like throwing in the proverbial towel, but the trend is clear: Stay long and strong Chinese equities. After all, it is the Year of the Rat ... and we all know that rats are the ultimate survivors.

Related Foolishness:

New Oriental is a Global Gains pick. Shanda is a Rule Breakers selection. Either service is free for 30 days.

Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the Jints, or taking a nap. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.