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The Great Chinese Crash of 2008

By Todd Wenning - Updated Nov 11, 2016 at 4:55PM

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Some see panic, others see profits.

Since October 2007, the once-hot Chinese stock markets have gone cold, with the Shanghai Composite (SSE) down 68% and the Hang Seng down 57%.

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

Company

Price Change Since 10/31/07

FocusMedia (NASDAQ:FMCN)

(88%)

Shanda Interactive (NASDAQ:SNDA)

(38%)

Ctrip.com (NASDAQ:CTRP)

(64%)

China Security and Surveillance (NYSE:CSR)

(79%)

Data from Yahoo! Finance.

Now think back to 2000, when the Nasdaq 100 lost 38% of its value -- with names like Priceline.com (NASDAQ:PCLN) and EarthLink (NASDAQ:ELNK) getting cut in half (or worse). 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.

Sohu.com (NASDAQ:SOHU), for instance, beat the Street's latest quarterly earnings estimate by more than 8%, quadrupling net income year over year. Apparently, that wasn't enough to satisfy investors -- Sohu shares remain about 50% 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 seven-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. Focus Media is a Motley Fool Global Gains recommendation. Ctrip.com is a Motley Fool Hidden Gems selection. Shanda Interactive and Focus Media are Motley Fool Rule Breakers recommendations. Priceline.com is a Motley Fool Stock Advisor selection. The Fool's disclosure policy is as wise as the old owl.

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Stocks Mentioned

Focus Media Holding Ltd. Stock Quote
Focus Media Holding Ltd.
FMCN
Booking Holdings Stock Quote
Booking Holdings
BKNG
$1,955.80 (1.60%) $30.83
Sohu.com Inc. Stock Quote
Sohu.com Inc.
SOHU
$17.27 (3.41%) $0.57
Trip.com Group Limited Stock Quote
Trip.com Group Limited
TCOM
$25.42 (-4.15%) $-1.10
Shanda Interactive Entertainment Limited Stock Quote
Shanda Interactive Entertainment Limited
SNDA.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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