Chinese stocks dropped the most in two weeks in New York after the Shanghai Composite Index (SHCOMP) closed below 2,000 for the first time in three years. Pactera (PACT) Technology International Ltd. and Youku Tudou (YOKU) Inc. led declines in the U.S.
The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese equities in the U.S. lost 1.1 percent to 91.67 by 12:31 p.m. Pactera, a Chinese software-outsourcing provider, slipped after saying sales growth will cool, while online video company Youku Tudou tumbled for the first time in six days. Muddy Waters LLC, the research firm that has made allegations of fraud against Chinese companies, isn’t focused on China anymore as the government is working to help companies conceal their records, founder Carson Block said on Bloomberg Television.
The China-US gauge is poised for its first decline in four months in November as the Asian nation’s seven-quarter slowdown impacts company profits. The value of shares on the Shanghai Composite slumped to a four-year low on Nov. 26 and the gauge trades for 9.5 times estimated earnings, almost half the average valuation for Brazil’s Bovespa (IBOV) and the BSE India Sensitive Index.
“Company profits in China will be under a great deal of pressure as there’s overcapacity and falling rates of productivity growth,” John-Paul Smith, a London-based emerging market strategist at Deutsche Bank AG, said in a phone interview. “The external environment hasn’t improved, it’s not positive for any sector.”
American depositary receipts of Pactera dropped 3.5 percent to $6.90 in New York after Chief Executive Officer Tiak Koon Loh said the Dalian, China-based company is anticipating a slowdown in 2013 sales growth as the economies of China and Europe falter.
Youku Tudou, China’s biggest online video company, declined 2.8 percent to $17.42, poised for its biggest one-day drop since Nov. 16.
ADRs of Trina Solar, China’s third-largest maker of solar panels, sank 6.8 percent to $2.34, after rising over the past three trading days. The stock’s 30-day volatility surged to 95.98, the highest since March.
Muddy Waters has lost interest in shorting Chinese stocks, a way of betting on their decline, as “the government has really taken the side of the fraud,” Block said in the interview from Los Angeles yesterday.
“The government is working with a number of these companies to try to conceal records that are public,” he said. “When you are up against that sort of strength of the ability to revise history, it becomes difficult. That is one of the reasons we’re not that interested in China anymore.”
Focus Pares Drop
Block has gained notoriety by short selling Chinese stocks listed in North America, including Sino-Forest Corp. which tumbled 74 percent before eventually filing for bankruptcy protection in March after Muddy Waters questioned their accounting. The firm has also targeted New Oriental Education & Technology Group Inc. and Focus Media Holding Ltd. (FMCN)
Focus Media, a Shanghai-based advertising company that Block claimed overstated its network, traded 0.2 percent lower at $23.92 yesterday, paring an earlier slump of as much as 2.7 percent. It is up 23 percent his year. Education provider New Oriental (EDU) sank 1.5 percent to $18.76.
An official at China’s consulate in New York, who asked not to be identified because it’s against their policy, said that she’s not in a position to respond to Block’s comments.
China ETF Sinks
The Shanghai Composite Index dropped 1.3 percent to 1,991.17 by the close in China, the lowest level since Jan. 23, 2009. Shares worth 33.1 billion yuan ($5.3 billion) changed hands on Nov. 26, the least since Nov. 7, 2008, while data showed that the number of A-share trading accounts that made transactions last week fell to 5.6 million, the lowest for a five-day week since at least January 2008.
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., slipped 0.8 percent to $37.05 in New York, as the Standard & Poor’s 500 Index of U.S. equities rose 0.1 percent to 1,408.08.
China’s seven-quarter slowdown, stoked by faltering demands for exports out of the U.S. and debt-plagued Europe, has spurred a 9.5 percent drop in the Shanghai Composite this year, the third straight annual loss. Investor interest in mainland China- traded shares has waned even as data showed signs of a growth recovery in the world’s second-largest economy. Industrial companies’ profit accelerated 20.5 percent in October, the statistics bureau said yesterday, while factory output and exports both rose last month by the most since May.
The Shanghai gauge has dropped 42 percent through yesterday from Aug. 4, 2009, when the gauge reached its highest level since the global financial crisis. The MSCI All-Country World Index (MXWD) rallied 21 percent in the same time. Thirty-day volatility in the Shanghai gauge was at 13.6 yesterday, compared with this year’s average of 17. The China-US index has a volatility reading of 19.7.
“Investors are voting with their feet,” Zhang Ling, general manager at Shanghai River Fund Management Co., said by phone yesterday. “Regulators need to roll out policies such as encouraging more investments in the biggest stocks to restore investors’ confidence.”
Policy makers have taken steps to revive confidence in the $2.6 trillion domestic stock market and boost economic growth. China Securities Regulatory Commission Chairman Guo Shuqing has reduced transaction fees on equity trades, urged listed companies to pay more cash dividends and changed how initial public offerings are priced. The government also more than doubled allotments under the expanded qualified foreign institutional investor program in April to $80 billion.
The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong dropped 0.4 percent to 10,527.84 yesterday, paring its advance this year to 6 percent.
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