The Great Chinese Crash of 2008

2008 was a devastating year for Chinese markets, with once-hot markets like the Shanghai Composite (SSE) down 65% and the Hang Seng down 48% for the year. We have no room to brag, but the 38% drop for the S&P last year looks a lot better by comparison.

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

Data from Yahoo! Finance.

Now think back to 2000, when the Nasdaq 100 lost 38% of its value -- with names like E*Trade (NASDAQ:ETFC) and Harmonic (NASDAQ:HLIT) 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.

Baidu.com (NASDAQ:BIDU) for instance, beat the Street's latest quarterly earnings estimate by about 15%, more than doubling net income year over year. Apparently, that wasn't enough to satisfy investors -- Baidu shares remain about 60% off their 52-week highs.

Will 2009 be a repeat year?
I don't mean to suggest that it's time to indiscriminately purchase Chinese stocks. Far from it. But in the wake of last year's 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 had a terrible 2008, but it certainly left some values behind 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 an eight-bagger since September 2002. 

2009 may not be a hallmark year for Chinese equities, but it's hard to imagine this dynamic economy remaining dormant for years to come.

With many other global markets also recovering from a rough 2008, the Motley Fool Global Gains team has been actively searching for great companies trading at bargain prices.

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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. American Oriental Bioengineering is a Motley Fool Hidden Gems selection. Baidu is a Rule Breakers pick. The Fool owns shares of American Oriental Bioengineering. The Fool's disclosure policy is as wise as the old owl.