Chinese stocks traded in the U.S. have been tainted by allegations of fraud involving companies like Sino-Forest Corp. (TRE) and are “pretty much untouchable,” according to Perella Weinberg Partners LP’s Daniel Arbess.
The Bloomberg China-US 55 index of Chinese stocks listed in New York slid 8.3 percent last year, after surging 54 percent in 2009 and 2010, as short sellers -- traders who bet asset prices will fall -- highlighted accounting irregularities by companies traded in North American markets.
Muddy Waters LLC’s Carson Block alleged Sino-Forest and U.S.-traded digital advertiser Focus Media Holding Ltd. overstated assets, spurring a regulatory investigation into the timber company and a 39 percent plunge in Shanghai-based Focus Media’s American depositary receipts the day Block’s report was released.
Short sellers have “clobbered the valuation of the companies,” Arbess said at the Bloomberg Link China conference in New York yesterday. “Once somebody yells fire, the market’s inclination is to get out of the building and worry about that later.”
Arbess has previously said Block’s claims about Chinese companies are unproven.
The Bloomberg China-US 55 Index of the most-traded Chinese New York-listed stocks climbed 1.6 percent to 104.96 in New York, the highest close in almost five months. Commodity producers led by Cnooc Ltd. (883) and China Petroleum and Chemical Corp. widened their premiums over Hong Kong shares on signs manufacturing from China to Germany and the U.S. is strengthening.
Focus Media Surges
ADRs of Cnooc, China’s biggest offshore energy producer, gained 3.7 percent to $210.91 to trade at a 2.3 percent premium over shares listed in Hong Kong. China Petroleum and Chemical, known as Sinopec, gained 2.4 percent to $123.05, expanding its premium to Hong Kong to 1.1 percent.
Focus Media (FMCN), which Muddy Waters’ Block said embellished the size of its advertising network and paid too much for acquisitions that were subsequently written down, surged 9.9 percent to $21.97 in New York, its biggest one-day gain since November. It was the biggest gainer on the China-US 55 index. Focus Media denied Block’s assertions on Nov. 22, saying that his report reflected a misunderstanding of its business.
Chinese equities are cheap and offer some of the best returns among global stocks, Kevin Pollack, a fund manager at Paragon Capital LP in New York, which invests in U.S.-traded Chinese shares, said at the Bloomberg Link conference.
‘Growth Story of Our Lifetime’
“There is a cleaning up process taking place right now and not every short seller attack is a success,” he said. U.S.- traded shares in Chinese companies will rise as the nation is the “growth story of our lifetime,” Pollack said.
Investors that are unwilling to buy Chinese stocks because of the taint of the fraud allegations will find it difficult to get exposure to the nation’s Internet, real estate, construction materials and retail sectors, Arbess said.
Casino operator Melco Crown Entertainment Ltd. (MPEL) gained 5.3 percent to $11.75 in New York as Macau, the world’s largest gambling hub and the only Chinese city where public gambling is permitted, reported casino revenue rose 35 percent in January, beating analysts’ estimates. Melco Crown’s ADRs traded at a 4.7 percent premium over its Hong Kong shares.
U.S. manufacturing grew at the fastest pace in seven months in January, data released yesterday by the Institute for Supply Management in Tempe, Arizona showed. China’s official manufacturing index unexpectedly showed expansion in the world’s second-largest economy, while a gauge from HSBC Holdings Plc and Markit Economics reached the highest level in three months. Data from the U.K, India, and Germany also showed manufacturing increased last month.
No Hard Landing
“The data today do help the whole story that maybe the economy isn’t as weak as some people feared,” Geoffrey Dennis, a global emerging-market equity strategist at Citigroup Inc, said by phone from Moscow. “Gradually the concerns about a hard landing in China will begin to fade. At the same time they will be easing fiscal and monetary policy.”
The Chinese economy will probably grow at an average 8 percent to 10 percent over the next 10 years, David Rubenstein, co-chief executive officer of private-equity firm Carlyle Group LP and Stephen Leeb, president of Leeb Capital Management Inc. in New York both said at the Bloomberg Link conference. Gross domestic product expanded 8.9 percent in the last three months of 2011, the slowest pace for 10 quarters.
Internet Stocks ‘Attractive’
Investors wanting to hedge against a possible hard landing in China should bet on declines in Chinese stocks and commodities, Gary Shilling, president of economic consulting firm A. Gary Shilling & Co., said at the conference today.
Indexes in Hong Kong and Shanghai fell yesterday on speculation the government may refrain from immediate loosening of monetary policy to stoke growth. The Hang Seng China Enterprises Index (HSCEI) slid 0.4 percent to 11,253.80 in Hong Kong and the Shanghai Composite Index (SHCOMP) lost 1.1 percent to 2,268.08.
There are some “bargains” among U.S.-listed Chinese stocks and a lot of opportunities in Internet companies, Paragon Capital’s Pollack said. “Chinese web IPOs in particular is a very attractive area,” he said, referring to companies that have conducted initial public offerings. Pollack said he used to have short positions on the sector.
Online video website-operator Youku Inc. (YOKU) gained 7.1 percent to $22.91 in New York yesterday, while Sina Corp (SINA)., which operates a service similar to Twitter, added 5.2 percent to $73.89. Social-networking site Renren Inc. (RENN) slid 9.7 percent to $5.01 and online bookseller E-Commerce China Dangdang Inc. (DANG) fell 4.8 percent to $7.
Facebook Inc., the dominant social networking site, filed to raise as much as $5 billion in an initial public offering in New York yesterday. The company didn’t specify the number or price of shares it will offer.
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., climbed 1.5 percent to $39.42. The fund is a popular way to trade China in New York “because it is liquid,” Kevin Carter, co-founder and chief executive officer at Baochuan Capital Management LLC, said at the conference.
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