Chinese stocks in New York are trading at the biggest discount to the Standard & Poor’s 500 Index since 2008 on concern a bird flu outbreak and property market curbs will douse the nation’s economic recovery.
The Bloomberg China-US Equity Index of the most-traded Chinese companies in the U.S. slumped 3.4 percent last week to a seven-month low of 89.04. The gauge traded at 13.5 times estimated earnings, 3.6 percent below the S&P’s valuation, data compiled by Bloomberg show. China Southern Airlines Co. and China Eastern Airlines Corp. lost more than 6 percent April 5, while Home Inns & Hotels Management Inc. tumbled 16 percent in the week.
As of April 5, six people had died from a new strain of avian flu that emerged in Shanghai and eastern China, prompting Hong Kong stocks to slide the most since July. The prospect of an epidemic is stoking concern the economy’s emergence from its seven-quarter slowdown will falter as the government orders cities to tame housing price growth and retail sales slow.
“Bird flu will weaken demand in the economy and adds to the bearishness in Chinese stocks,” John-Paul Smith, an emerging-markets strategist at Deutsche Bank AG, said in an interview from London April 5. “The sentiment has turned for the worse over the past month. Going forward, a lot of industrial companies will face considerable difficulties.”
American depositary receipts of Melco Crown Entertainment Ltd., which operates casinos in Macau, lost 6.6 percent last week to $21.81. The slump left the ADRs at a 1.8 percent discount to the company’s shares in Hong Kong, the most since Feb. 20.
The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., slid 0.9 percent April 5 to $35.64 in New York, the lowest level since Oct. 10. The ETF lost 3.5 percent in the week.
The Hang Seng China Enterprises Index in Hong Kong tumbled 4.3 percent last week to 10,429.31, the lowest close since Nov. 28. China’s mainland exchanges were shut for a holiday April 5 and resume today.
Home Inns, which operates a budget hotel chain, posted the steepest decline among the most-traded Chinese stocks in the U.S. last week, amid concern the flu deaths may deter people from traveling. The ADRs sank to $24.95, the lowest level since Sept. 28.
ADRs of China Southern, Asia’s biggest air carrier by passenger numbers, slid 12.5 percent last week to $25.06 in New York, the lowest level since Dec. 28. China Eastern, the second-largest carrier in the country, fell 7.6 percent to $20.03.
Shanghai, China’s financial hub, was to close all live poultry markets beginning April 6, city officials said at a briefing April 5. Vietnam’s Ministry of Agriculture and Rural Development banned all forms of transport, trade and consumption of poultry via its northern border with China April 2.
Ting Lu, chief economist at Greater China at Bank of America Corp., said that he may revise his second-quarter economic growth forecast to 8 percent, from 8.1 percent should the flu outbreak spread.
“The ongoing bird flu could have sizable impacts on the economy, so investors are justified to be cautious,” Lu wrote in a note to clients April 5.
The Bloomberg China-US index has lost 13 percent since reaching an eight-month high Jan. 10.
China’s largest cities, including Beijing and Shanghai, restricted multiple home purchases this month after policy makers asked local governments to step up efforts to cool the property market. Retail sales growth in the January to February period was the slowest since 2004, while manufacturing expanded less than economists forecast in March.
When the valuation for Chinese U.S.-traded stocks fell below that for the S&P in December 2008, the Bloomberg China-US measure gained 84 percent in the ensuing seven months through the start of July 2009, outpacing the 13 percent rally in the U.S. benchmark.
Edmund Harriss, who oversees $300 million as a fund manager at Guinness Atkinson Asset Management LLC in London, said that Chinese stocks are attractive at these depreciated levels.
“With the various knocks we had in the market, quite a lot of the pessimism has come out of valuations so they are looking very cheap,” Harriss, who invests in Chinese stocks, said in an interview by phone April 4. “I am still optimistic on China. Even in real estate where we’re talking about the policy curbs, they are not hugely draconian.”
SouFun Holdings Ltd., China’s biggest real estate website, fell 2.8 percent to $23.01 April 5, extending its drop in the week to 12 percent. Short seller Glaucus Research Group rated the company a “strong sell” in an April 4 report, saying that SouFun spent millions of dollars buying luxury real estate in New York and transferred money to charities of “dubious authenticity.”
The company said in a statement April 5 that the accusations are “misleading,” adding that a property purchase referred to in the report was for legitimate business purposes. All auditing information has been disclosed to U.S. regulators, SouFun said.
New Oriental Education & Technology Group Inc., China’s largest private educational company, fell 11 percent last week to a one-month low of $16.07. Oppenheimer & Co. analyst Ella Ji said April 2 that students may avoid large gatherings because of the flu, impacting New Oriental.
The Standard & Poor’s 500 Index fell 1 percent last week to 1,553.28 after a U.S. government report showed employers hired fewer workers than economists estimated in March. The measure trades at 14 times estimated earnings, data compiled by Bloomberg show.