Oberwies Sees Stock Slump ‘Overreaction’ to Cash Squeeze
Chinese stocks are poised to rebound from a one-month low as policy makers inject cash into the financial system to stem a surge in interbank lending rates, according to Oberweis Asset Management Inc.
The Shanghai Composite Index (SHCOMP) dropped the most since May 2011 last week and a Bloomberg gauge of the most traded Chinese stocks in the U.S. fell to the lowest since Nov. 14 on concern the cash squeeze will hamper growth in the world’s second-biggest economy.
The price declines are overdone because the central bank will keep pumping money into the financial system to ease the cash shortage like it did in June, according to Jeff Papp, a senior analyst at Oberweis, which oversees $700 million in assets. Bloomberg’s China-US index touched a two-year low in June only to soar 27 percent over the next six months as the seven-day repurchase rate jumped 328 basis points in the week, the most since January 2011. The benchmark borrowing cost was 7.6 percent on Dec. 20.
“Markets tend to overreact to these spikes in rates, similar to what we saw in June,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis, which oversees $700 million in assets, said in an e-mail Dec. 20. “They will continue to inject funds to bring things down to healthy levels. You have to remember that the PBOC controls all this.”
Borrowing costs in China climbed in recent weeks as the government shifted toward allowing market-determined interest rates. The PBOC conducted more than 300 billion yuan ($49 billion) of short-term liquidity operations over three days, it said Dec. 20 on its microblog.
The Bloomberg China-US gauge tumbled 1.6 percent in its second weekly decline to 103.75 in New York on Dec. 20. The slump trimmed its rally for the year to 4.6 percent. The Hang Seng China Enterprises Index in Hong Kong sank 3.6 percent last week to 10,628.50, the lowest since Nov. 14, while the Shanghai Composite Index plunged 5.1 percent to a four-month low of 2,084.79.
Youku Tudou Inc. (YOKU), China’s largest video website operator, fell 7.2 percent over the week, leading declines on the China-US gauge. The retreat, the steepest in four months, pared the Beijing-based company’s gain for the year to 57 percent.
NQ Mobile Inc. (NQ), an Internet security company, slid 5 percent last week to $11.50, extending declines into a fourth week. Muddy Waters LLC, founded by short-seller Carson Block, alleged that NQ Mobile inflated sales in an Oct. 24 report.
Muddy Waters offered to pay for an accounting firm to evaluate an independent committee’s investigation into NQ Mobile, according to a letter published Dec. 19. NQ denied the allegations and said last month its independent special committee retained the law firm Shearman & Sterling LLP to review Muddy Waters’s report.
Oil companies fell last week after China raised gasoline standards. Cnooc Ltd. (883), the nation’s biggest offshore crude explorer, slumped 4.8 percent to $185.20, the largest weekly decline since October. China Petroleum and Chemical Corp., Asia’s biggest refiner, known as Sinopec, fell 3.6 percent to $80.70. PetroChina Co., the country’s biggest oil producer, sank 2.8 percent to $108.84, the lowest since August.
“In the short term it’s a tightening on a lot of companies that are publicly traded,” Michael Kass, a New York-based portfolio manager at Baron Capital Inc., which manages $20 billion in assets including emerging-market stocks, said by phone Dec. 20. “If you get a further credit tightening, which is starting to play out now there, then it may not be that optimistic for 2014.”
The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., tumbled 2.8 percent last week to a one-month low of $37.32 in New York. The ETF has rebounded 18 percent from a low reached June 25.
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