China stocks crash, now what? Buy

Published Thu, May 28 201511:10 AM EDTUpdated Thu, May 28 20152:03 PM EDT

U.S. investors woke up Thursday to a crash in China's Shanghai composite greater than 6 percent, knocking down a stock market they have been piling into as it doubled over the last 12 months. History shows investors should buy even more Chinese shares trading on U.S. exchanges after big selloffs such as this one. The iShares FTSE China Large-Cap ETF is the most popular way to trade Chinese stocks stateside. The ETF, which invests in local issues of the country's stocks, was down about 4 percent Thursday morning. Using Kensho, a quantitative tool used by hedge funds, CNBC Pro looked at the more than 10 times in the last decade that the ETF dropped more than 3 percent in one day. The study showed that the first 30 days were choppy, but if investors are patient, they will be rewarded over the next 90 days to 120 days. Read More Ride the hot China market now, but beware As we highlighted two weeks ago , investors may get one more chance like this one to get into the hot China market, the best performing stock market on the globe over the last 12 months. The reason is a perceived commitment by the People's Bank of China to stimulate the economy in the future after already cutting interest rates for the third time in six months. The main cause of Thursday's drop was the country's brokerages raising curbs on lending used to fund stock purchases, a move that they've done in the past to tamper frothiness. The PBOC also took some money out of the system through the sale of some repurchase agreements, a move that signaled to many that it may not keep easing in the future. Michael Block of Rhino Trading Partners wrote to his clients in a note Thursday morning: "So apparently the Chinese central bank is not so keen on easing. I am not sure I believe that, frankly. This smells more like a selective mop up type of job than any shift in policy. But take that, a 15 percent rise in the index over the previous six days, more talk of margin requirements going higher, and a looming IPO backlog the size of Charlie Sheen's liver, and you have the recipe for a 6.5 percent drop." It's not just local investors that better hope Block is right. Global investor money flows are following the countries that have accomodative central bank policies. U.S. investors put about $2 billion into China-focused funds so far this year while pulling $42 billion out of domestically focused funds during the same period, according to Morningstar data. As for individual stock investments, many China ADRs traded on U.S. exchanges tend to have even more explosive gains than the China ETF following a one-day crash. Baidu shares tripled on average, 120 days following a big single day drop. Cnooc , China Mobile , China Life Insurance and China Petroleum shares all showed big gains as well. Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

stock investor gestures as she checks share prices at a security firm in Fuyang, east China's Anhui province on May 28, 2015. Chinese stocks plunged 6.5 percent on May 28 on concerns over tight liquidity and stricter requirements for margin trading, after closing at a more than seven-year high the previous day, dealers said.

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U.S. investors woke up Thursday to a crash in China's Shanghai composite greater than 6 percent, knocking down a stock market they have been piling into as it doubled over the last 12 months.

History shows investors should buy even more Chinese shares trading on U.S. exchanges after big selloffs such as this one.