The Shanghai Composite stock index closed down 5% on July 29. The intraday damage was worse with stocks down 7% at one point.

The rout wasn’t surprising. The Shanghai market was up almost 80% for 2009. And rumors have been swirling in recent days that officials in Beijing, worried that the government’s economic stimulus package was about to produce new stock market and real estate bubbles, were going to step on the financial brakes. Under the circumstances taking some profits made sense to a lot of the traders and speculators in Shanghai.

I don’t know how long this much overdue correction will last. The likelihood is that the rumors about Beijing taking some action to damp asset prices will keep the markets nervous until the government actually acts. (When it does, I’ll bet that the stock market will be back off to the races because any restrictions are likely to be slight indeed. Nobody in Beijing wants to do anything now that would seriously threaten economic growth)

But if Chinese financial markets do drop for a few more days, it could give you a great opening to hunt for bargains. Not in Chinese stocks. Because of the way that China’s financial markets are structured, I think investors who put money directly in Chinese stocks are asking to get fleeced.

No, I’d look for bargains in Brazilian equities. They’re my current best idea for how to profit from China’s long term economic growth. I’ve even got a suggestion for which two Brazilian stocks to watch.

The Brazilian stock market , the Bovespa, has become closely linked to China’s financial markets. On July 29, when the Shanghai Composite fell by 5%, Brazial stocks, as measued by the iShares MSCI Brazil Index ETF (EWZ), fell 2.3%.

The connection isn’t hard to understand. China has become Brazil’s biggest trading partner.

How big? For some Brazilian companies bigger than big. How about huge? About 66% of Vale’s iron ore production gets exported to China.

So, as you’d expect, when Shanghai stumbled so did Vale. On July 29, the stock dropped 3.1%.

I’d be ecstatic to get Vale at $14 a share. (Anything below $16 would make me happy, actually.) The company is the low cost producer of iron ore in the world and over the long-term will give your portfolio important exposure to the growth of the Chinese and Brazilian economies.

Itau Unibanco (ITUB) is the other Brazilian stock I’m tracking right now to see if it gets to bargain status. The bank, after a recent merger the biggest in Brazil, is a play on the growth of the Brazilian economy and especially on demand from the country’s growing middle class for new financial products and services. I’d be ecstatic to get the stock at $11 (but happy with anything below $13.)

Both stocks are members of my long-term Jubak  Picks 50 portfolio. (Full disclosure: I own shares of Itau Unibanco in my personal portfolio.)