The benchmark index for Chinese equities in New York rose for the first time in three days as gains in China Life Insurance Co. overshadowed concern a U.S. probe focusing on auditors of China-based stocks will spur delistings.
The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. climbed 1.9 percent to 93.61 yesterday. China Life, the nation’s biggest insurer, surged the most in five months while Aluminum Corp. of China Ltd. traded at the widest premium to Hong Kong stock in more than two weeks. Education service provider New Oriental Education & Technology Group Inc. extended its steepest two-day drop since July and E-House China Holdings Ltd. sank to a record low.
New Oriental slid yesterday on speculation the Securities & Exchange Commission alleging units of the Big Four auditors aren’t cooperating in their fraud probe may spur Chinese companies to withdraw from U.S. exchanges. While New Oriental isn’t being investigated, the issue will weigh on their valuation, Wells Fargo & Co. said in a Dec. 4 note. China Life extended its 4.2 percent jump in Hong Kong after the government abolished a regulation limiting investment in commercial banks by insurers.
Opening up what insurers can invest in “should improve the profitability of those companies over time,” Jeff Papp, a senior analyst at Oberweis Asset Management, which invests in Chinese companies, said by phone from Lisle, Illinois yesterday. “It’s positive for insurers because they gain higher yields, and for markets because clearly insurance companies haven’t been able to buy securities in a fashion we would expect in more developed markets.”
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., jumped 3 percent to $38.12, the highest close since May 2. The Standard & Poor’s 500 Index gained 0.2 percent to 1,409.28 as better-than-forecast economic reports outweighed a decline in Apple Inc., its biggest stock.
The Hang Seng China Enterprises Index advanced 2.9 percent to 10,830.04 yesterday while the Shanghai Composite Index of domestic shares gained 2.9 percent to 2,031.91, the biggest one-day advance in three months. China will keep macroeconomic policies stable and promote urbanization and expand domestic demand, the Communist Party’s Politburo said in its first assessment of the world’s second-largest economy, the official Xinhua News Agency reported Dec. 4.
China Life’s American depositary receipts surged 4.3 percent to $45.51, the biggest rally in five months.
Aluminum Corp, the biggest producer of the light metal in China known as Chalco, advanced 3.2 percent to $10.98, the biggest increase since Nov. 1. Its American depositary receipts, each representing 25 underlying shares, traded 1 percent above its Hong Kong stock, the highest premium since Nov. 19.
Beijing-based Chalco plans to build an alumina facility with a capacity of 1 million metric tons a year in Indonesia as it seeks to tap bauxite resources overseas after the southeast Asian nation curbed exports, according to a Nov. 30 interview with President Luo Jianchuan in Chongqing.
Three-month aluminum contracts added 0.5 percent on the London Metal Exchange, to $2,105 a metric ton.
Yanzhou Coal Mining Co., the fourth-largest coal miner in China, added 3.5 percent to a one-month high of $15.72.
China Southern Airlines Co., the nation’s biggest carrier by passenger numbers, advanced 3 percent to $22.75 in New York, the steepest rally since Nov. 23.
The Guangzhou-based airline agreed to buy 10 Airbus SAS A330s after the European Union backed down in a dispute with China over emission levies. Airbus will deliver the jets starting 2014 to 2016, China Southern said in a filing to the Hong Kong stock exchange yesterday.
New Oriental sank 9.2 percent to $16.41 after the previous day’s 11 percent tumble, which was the biggest loss since July 18. The Beijing-based company was contacted by the New York Stock Exchange “in view of the unusual market activity” in its shares on Dec. 4, New Oriental said in a statement yesterday. “The Company stated that its policy is not to comment on unusual market activity,” New Oriental said.
Wells Fargo analyst Trace Urdan said on Dec. 4 the company is at risk of being delisted after the SEC’s investigation. In an updated note the same day, Urdan said he had no reason to believe New Oriental Education was subject of the probe. Urdan maintained an outperform recommendation on the education company.
New Oriental has been targeted by short seller Carson Block and his research firm Muddy Waters LLC for allegedly inflating cash balances to gain auditor approval. The company said in September that a committee of independent company directors found no evidence to back up Muddy Waters’ allegations. Block countered this by saying he was “more convinced than ever” they were misleading investors.
E-House, a Shanghai-based property agent, dropped 7.5 percent to $3.1, the lowest level on record.
U.S. and Chinese regulators will have to come to a compromise in their conflict over auditor oversight to prevent Chinese companies traded in the U.S. from being delisted, Steven Winegar, Kong-based partner at law firm Paul Hastings LLP, said on a conference call yesterday.
“That of course has a catastrophic effect on the market value and on the companies themselves.” he said. “It’s almost unthinkable that it will get to that stage.”
Thirty-day volatility in the Bloomberg China-US gauge increased to 20.2 yesterday from 19.6 a day earlier, the highest level since Aug. 24. The Bloomberg Chinese Reverse Mergers Index, which tracks a basket of companies that gained U.S. listings after buying firms that already trade, sank 1.7 percent yesterday, the biggest slump since June 21. The gauge has lost 61 percent over the past two years.
Should Chinese ADRs continue to trade the way they do now, they “don’t need SEC to delist them - they’d be happy to get privatized themselves,” Junheng Li, founder and senior equity analyst at researcher JL Warren Capital LLC in New York, said in an e-mail Dec. 4.