China small-cap stocks have seen a number of frauds, near-frauds and alleged frauds this year, all of which have sent share prices tumbling. I have heard from more than one investor who has said that they will no longer invest in any China stocks due to these problems.
The only one of these stocks to rise was Puda Coal (PUDA) which announced stellar third-quarter results and has been on a meteoric rise over the past few months.China stocks should be viewed as high risk, with the potential for high reward. During 2009, there were dozens of stocks that offered returns which were five, 10 and even 15 baggers. Anyone riding that train could do no wrong and made a fortune. However, stocks with that type of upside will naturally have a much greater degree of downside. But in 2009 and early 2010, investors became complacent and felt that these stocks were a one-way ride up. The past six months have shown us that this is clearly not the case. Now that China small caps are no longer a one-way street, I think that they are not appropriate for many investors but still very appropriate for those investors who have a high risk tolerance and a demand for high returns. But to repeat, these stocks are no longer appropriate for conservative investors. I currently follow 302 China companies and track all of their technical and fundamental data. This is actually much easier than it sounds if you use the right software. I use a program call XLQ which can be obtained at