Chinese Stocks Gain in U.S. as Mainland Surge Fades on Valuation

U.S.-traded Chinese stocks rose a second day as Tuniu Corp. gained after getting a $500 million investment and traders considered bearish calls on mainland-traded shares by banks including Morgan Stanley, which last week warned of excessive valuations.

The Bloomberg China-U.S. index jumped 1.1 percent to 128.97 on Friday, pushing the two-day gain to 2.6 percent. The gauge ended the week little changed as the Shanghai Composite Index plunged 5.3 percent, the most in five years. New York-traded Chinese equities have trailed the local stocks as a world-beating rally pushed the benchmark to a seven-year high.

The surge in mainland stock valuations has prompted investors including Schroder Investment Management Ltd. to buy cheaper U.S.-listed firms for China exposure. Morgan Stanley downgraded Chinese stocks for the first time in more than seven years, and asset managers from HSBC Global Asset Management to Macquarie Investment Management have voiced concern that the rally in the Chinese market has gone too far, too fast.

“Up until April, U.S.-listed stocks had underperformed in a dramatic fashion,” Brendan Ahern, chief investment officer at Krane Fund Advisors LLC in New York. said by phone. “If you could own any part of China, you would own the U.S. names right now, which include some of the best companies in China.”

Trailing Return

The Bloomberg China-US gauge has climbed 31 percent in the past year, less than one-third of the gain in the Shanghai index. The city’s exchange link with Hong Kong and investor expectations for government stimulus to revive economic growth has spurred unprecedented demand for companies in the local market.

The Hang Seng China Enterprises Index has jumped 44 percent in the past year as the mainland rally spread to Hong Kong, lifting companies like Tencent Holdings Ltd., Asia’s second largest-Internet company, by 63 percent. That compares with a 28 percent advance for Alibaba Group Holding Ltd., the biggest Internet firm in Asia, since its U.S. offering in September. Baidu Inc., China’s largest search engine, has advanced 29 percent in New York.

Alibaba, which benefits from growth in consumer spending in the same way its Hong Kong-listed peers do, has underperformed partly because “it’s not accessible by the mainland money that has flooded into Hong Kong,” Simon Webber, a lead portfolio manager of global equities at Schroder said in an interview on May 6 in New York.

Excess Signal

There are “clear” signs of excess in the mainland market, he said. “You can’t expect to make a good return from the starting point of a valuation multiple” that goes up to as much as 50 in some companies.

China’s central bank said on Friday it will walk a fine line in its policy operations to avoid excessive easing as rising debts endanger the nation’s economic expansion.

The Shanghai Composite sank to 4,205.92 last week, retreating 7.1 percent from its April 27 high. The Hang Seng index for Chinese companies trading in Hong Kong has fallen 4.7 percent to 14,049.66 from its peak last month. The Bloomberg China-U.S. benchmark has lost 2.7 percent during the same span.

Tuniu gained 4.5 percent on Friday to a six-month high of $18.03 in New York. A group of investors led by JD.com Inc. agreed to invest in the online package-tour booking site, according to a May 8 statement.

Investor Concerns

While the country’s official Xinhua News Agency said May 5 that the stock-market rally has further to go and shares rose Friday on stimulus speculation after disappointing export data, a growing number of forecasters have voiced concerns.

Mandy Chan, an investment director at HSBC Global Asset Management, said China’s stocks face risks from rising valuations and a slowing economy. Even after last week’s drop, the Shanghai Composite is valued at 16 times estimated earnings for the next 12 months, a 57 percent premium over the five-year average, according to data compiled by Bloomberg.

Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley, who cut his recommendations on Chinese equities to equal-weight from overweight, said the market has become expensive and business profitability fell to the weakest level since 2009.

“China’s dramatic recent outperformance has driven a deterioration in absolute and relative valuations and a worsening technically overbought situation,” Garner said in a May 7 report.

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