Options dealers are charging the biggest premium in four months to protect against losses in Chinese companies amid increasing concern the world’s second-biggest economy is slowing down.
The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. has lost 3.4 percent in July and the Hang Seng China Enterprises Index slid 1.8 percent through July 27, headed for its third monthly slump. Concern losses will worsen has lifted the AlphaShares Chinese Volatility Index, derived from options on companies trading in Hong Kong, to 23.13 on July 26, 32 percent higher than the Chicago Board Options Exchange Volatility Index, near the widest gap since March.
A government report on July 27 showed Chinese industrial companies’ profits fell for a third month in June, as its economy expanded 7.6 percent in the second quarter, the slowest pace in three years. New Oriental Education & Technology Group Inc. led the monthly slump in U.S.-listed peers with a record 51 percent drop. It said July 17 the U.S. regulator was investigating into it, and short-selling firm Muddy Waters LLC followed with a report containing allegations of fraud.
“You have the combination of fears that China is going to have a hard landing and some Chinese companies have questionable accounting,” Kevin Carter, chief executive officer of Baochuan Capital Management LLC, which compiles the China volatility index, said by phone July 27. “There’s a lot of negative headlines about economic figures. Smaller, private Chinese companies have done worse than the bigger ones, with their valuations at record lows.”
China ETF Rises
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., advanced 2.6 percent last week to $34.12, for a gain this month of 1.3 percent. The Standard & Poor’s 500 Index climbed 1.7 percent last week to 1,385.97.
AsiaInfo-Linkage Inc., a Beijing-based developer of telecommunication software, may report today a 35 percent decline in adjusted profit for the second quarter, the average estimate of six analysts compiled by Bloomberg showed. Ctrip.com International Inc. said last week second-quarter net income fell 55 percent from a year ago.
AsiaInfo, which sells to China Unicom (Hong Kong) Ltd., China Mobile Ltd. and China Telecom Corp., may say sales rose 15 percent from a year ago to $127 million, analysts predicted.
“AsiaInfo’s margins are under pressure from wage inflation and because there isn’t a lot of pricing power,” James E. Friedman, an analyst at Susquehanna Financial Group in New York said in an interview last week.
The company’s investor relations director Phyllis Feng, in an e-mail on July 26, said that “wage inflation and increasing headcount is the factor for the net-income growth slowdown.”
ZTE Corp. was the biggest decliner on the Hong Kong stock gauge for Chinese enterprises after the company was downgraded at nine securities firms. It said in a July 13 regulatory filing net profit for the first six months this year dropped as much as 80 percent from a year earlier due to reduced investment income, foreign exchange losses and delayed network contracts.
“American investors are extremely bearish toward China. If there’s any slightly bad news about a company, the stock would fall like a stone,” Michael Ding, lead manager of the China Region Fund at U.S. Global Investors Inc., which oversees $2.2 billion, said in a telephone interview from San Antonio, Texas on July 27. “In this macro trend of economic growth slowdown, corporate revenue and earnings will slow down in general, and that will be reflected in weak stock prices.”
Net income for China’s 117 central government-run companies fell 16 percent in the first half from a year earlier, the nation’s state assets supervision agency said July 20 on its website.
Barclays Capital forecast another 25 basis-point cut in China’s interest rate, from its previous prediction of no more rate reductions this year, economists headed by Jian Chang said in a July 27 report, citing a worsening external outlook.
China has reduced benchmark interest rates three times since July last year, and has lowered required reserve-ratio for banks by 1 percentage point this year to spur lending.
Seaspan Corp., a Hong Kong-based container ship operator, is due to report second-quarter results on Aug. 1. Adjusted profit grew 6 percent from a year ago to $30.4 million, from $56.6 million in the previous three months, according to the average prediction of five analysts in a Bloomberg survey.
The Bloomberg gauge of the Chinese shares traded in the U.S. rose 2.5 percent to 88.13 on July 27 for a five-day gain of 2.3 percent, the first increase in four weeks. The Shanghai Composite Index added 0.1 percent to 2,128.77, ending the week down 1.8 percent. The gauge has fallen for six weeks in a row.