Yuan NDFs Drop as Baidu Outlook Trails Analysts: China Overnight

Investors boosted bearish bets on the yuan, driving forwards down the most in six days, on speculation Chinese policy makers are less inclined to allow appreciation or to ease monetary policy to support the economy.

Twelve-month non-deliverable forwards on the yuan weakened 0.18 percent to 6.36 per dollar yesterday in New York, defying the currency’s surge to a 19-year high in Shanghai. Equity trading on U.S. exchanges was canceled for two days as Hurricane Sandy moved toward New York City. Baidu Inc. (BIDU) issued a fourth- quarter sales forecast that trails analysts’ forecasts, while New Oriental Education & Technology Group Inc. (EDU) reported lower- than-estimated earnings.

Further strength in the yuan, which is poised for its third monthly gain versus the dollar, is unlikely because of economic “uncertainty,” China Securities Journal reported yesterday, citing Chen Daofu, a researcher at the State Council’s Development Research Center. The People’s Bank of China is also “much less” inclined to continue cuts to bank reserve ratios, Financial News, a publication attached to the central bank, said in a front-page commentary yesterday.

“Foreigners are generally skeptical of China’s recovery,” Gabriel Wallach, chief investment officer at BNP Paribas Investment Partners in Boston, said in a phone interview yesterday. “We’re still in the early days and investors have been disappointed with the speed of Chinese authorities in terms of cutting interest rates and banks’ reserve requirements.”

Rising Inflows

The decline widened the yuan forward contracts’ discount to the onshore rate to 1.8 percent, from a gap of 1.5 percent on Oct. 26. The yuan appreciated 0.08 percent to 6.2436 per dollar yesterday in Shanghai, according to the China Foreign Exchange Trading System. It touched 6.2371, the highest level in 19 years.

Yuan positions at local lenders accumulated from sales of foreign exchange to the central bank, an indicator of investment inflows, rose 130.7 billion yuan ($21 billion) to 25.77 trillion yuan in September, after two months of declines, according to official data issued on Oct. 19. China-focused equity funds took in $913 million in the week ended Oct. 24, the most since July 2008, Cambridge, Massachusetts-based data provider EPFR Global said in an e-mail Oct. 26.

The Shanghai Composite Index (SHCOMP) of domestic shares fell 0.4 percent to a one-month low of 2,058.94 yesterday. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong climbed 0.9 percent to 10,546.24, after a 2.2 percent loss last week.

Sinopec Profit

The Bloomberg China-US Equity Index of the most-traded Chinese companies in the U.S. declined 1.3 percent last week after rising in the previous four weeks.

Baidu Inc., which runs the most-popular search engine in China, said third-quarter profit rose 60 percent from a year earlier to 3.01 billion yuan. The average forecast of 10 analysts surveyed by Bloomberg was for 2.77 billion yuan.

The Beijing-based company expects sales in the fourth quarter to increase as much as 42 percent to 6.35 billion yuan, after gaining 50 percent in the previous three months, according to its statement yesterday. That falls below the analysts’ projection of 6.41 billion yuan. Baidu’s American depositary receipts have lost 2.6 percent this month to $113.83 by Oct. 26.

China Petroleum & Chemical Corp. (600028), Asia’s biggest refiner that is also known as Sinopec, posted better-than-expected third quarter profit as two increases in state-controlled retail fuel prices and improved petrochemical sales bolstered earnings.

Below Cost

China, which controls retail fuel prices to contain inflation, raised prices in August and September, after inflation dropped to 1.9 percent in September from as high as 4.5 percent in January. Sinopec is forced to sell fuel below cost under the pricing system.

Net income fell 9.4 percent to 18.3 billion yuan ($2.93 billion) in the three months ended Sept. 30, from 20.2 billion yuan a year ago, Sinopec said Oct. 28 in a statement. That beat the 14.19 billion-yuan median of nine analysts’ estimates compiled by Bloomberg.

Sinopec’s American depositary receipts have dropped 1.3 percent this year to $163.67 when they last traded in New York on Oct. 26.

New Oriental, the biggest private educational service provider in China, said yesterday that net income for the three months ended Aug. 31 increased by 5.7 percent from a year ago to $95.9 million, missing the $113 million average projection of four analysts. The company’s 61-cent per share profit compared with the analysts’ forecast for 72 cents per share.

SEC Investigation

ADRs of Beijing-based New Oriental have dropped 31 percent this year. The company said in an Oct. 12 statement that the U.S. Securities and Exchange Commission, which started an investigation into New Oriental in July, has no objection to the inclusion of its schools into its China-based units, and to the consolidation of the Chinese entity into the listed company’s financial statements.

Muddy Waters LLC, a short-selling firm founded by Carson Block, first alleged in July that New Oriental misled the market about the number of its schools, accusations New Oriental denied.

China Telecom Corp., the country’s biggest fixed-line carrier, said yesterday that third-quarter profit fell 7.3 percent after it subsidized Apple Inc. iPhones to boost wireless users. Net income fell to 3.75 billion yuan from about 4.05 billion yuan a year earlier, the Beijing-based company said in a statement. Sales in the third quarter rose 16 percent to 72 billion yuan.

Spreadtrum Downgraded

Sina Corp. (SINA), which runs the Twitter-like Weibo service in China, was cut to the equivalent of sell at HSBC Holdings Plc by Hong Kong-based analyst Chi Tsang, who also lowered his price target for the company to $54 from $62. Sina’s shares have lost 13 percent this month.

Spreadtrum Communications Inc. (SPRD), a Shanghai-based maker of mobile phone chips, was initiated as a new buy by Deutsche Bank AG equity analyst Jessica Chang, who set a 12-month target price of $28.70. The company’s shares have advanced 11 percent this month to $22.70 on Oct. 26 in New York.

BYD Co. (BYDDF), the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), said yesterday that net income this year may fall as much as 98 percent to 27.7 million yuan, as a slowing global economy damps demand for its cars, batteries and solar-energy cells. Its ADRs have gained 13 percent this month in over-the-counter trading in the U.S., paring losses this year to 8.5 percent.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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