Spending Shift Spurs Industrial ETF Drop: China Overnight

The worst performing Chinese exchange-traded funds in the U.S. this year are those focused on infrastructure and industrial stocks as the government shifts away from driving growth through public spending.

The EGShares China Infrastructure Index Fund has handed investors an 11 percent loss in 2013, while the Global X China Industrials ETF dropped 9 percent, exceeding the average 3.3 percent slide in all U.S.-listed Chinese ETFs, data compiled by Bloomberg show. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. slumped 7 percent in the three months to March 31, its worst first quarter since 2008.

China, which installed new leaders last month, is looking to reorient the world’s second-largest economy toward consumer demand and away from a focus on public spending and infrastructure building. Industrial output had the weakest start to a year since 2009, while Yanzhou Coal Mining Co. and Aluminum Corp. of China were among the 10 biggest decliners on the Bloomberg China-US gauge last quarter.

“Most people accept that the structure of the Chinese economy needs to change over time, which means less infrastructure and less construction at the margin,” Tony Hann, who oversees $400 million of assets as head of emerging-market equities at Blackfriars Asset Management Ltd., said by phone from London March 28. “So you need to adjust your earnings expectations for those infrastructure companies as analysts are cutting their growth forecasts.”

‘Unsustainable’ Model

Former Premier Wen Jiabao said in his final annual report delivered March 5 that China’s growth model was “unsustainable” and that the nation needed to take “expanding domestic demand as our long-term strategy for economic development.” New Premier Li Keqiang said last month that growth, which averaged 10.4 percent a year between 2001 and 2011, must be maintained at an average 7.5 percent through 2020.

Yanzhou Coal, China’s fourth-largest producer of the fuel, sank 20 percent in the three months to March 31 to $13.69, the biggest drop in three quarters. The company’s 2012 net income fell 35 percent to 5.52 billion yuan ($890 million), according to a statement March 22. Of 32 analysts that cover Yanzhou’s Hong Kong stock on Bloomberg, 50 percent rate it sell.

Aluminum Corp., the country’s China’s biggest producer of the light metal, plunged 18 percent last quarter to $9.73. The company, known as Chalco, had a net loss of 8.23 billion yuan in 2012, it said March 27. About 82 percent of analysts that cover Chalco’s Hong Kong shares rate them sell.

Banking Curbs

China, which tightened curbs on the property market March 1, told banks March 28 to limit investments of client money in debt that isn’t publicly traded to 35 percent of funds raised from the sale of wealth-management products in a bid to cut violations of lending restrictions. The products may have climbed to 13 trillion yuan ($2.1 trillion) at the end of 2012, from 8.5 trillion yuan in 2011, according to Fitch Ratings.

Chinese U.S.-traded property stocks fell March 28 on concern the restrictions will reduce bank lending to the sector. U.S. markets were closed for a holiday March 29.

E-House China Holdings Ltd., a real estate agency based in Beijing, plunged 3.5 percent to $4.65, the steepest slump since March 13. SouFun Holdings Ltd., the Beijing-based owner of China’s biggest property information website, slid 3 percent, the most in two weeks, to $26.21.

“These funding curbs may be more important than previous curbs on the property sector, if the money really isn’t available that’s when demand starts to fall apart,” Michael Shaoul, the chairman of Marketfield Asset Management LLC, which oversees more than $6 billion, said by phone in New York March 28. “At some point in 2013 we’ll exceed the lows of 2012,” he said, referring to Chinese stock indexes.

S&P Jumps

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., slipped 1.1 percent to $36.93 in New York March 28, bringing its decline last quarter to 8.7 percent. The Standard & Poor’s 500 Index added 0.4 percent to 1,569.19, lifting its 2013 jump to 10 percent.

Semiconductor Manufacturing International Corp., a circuit foundry known as SMIC, tumbled 4.3 percent to $2.92 March 28, sliding the most since Feb. 19.

China Life Insurance Co., the country’s biggest insurer, sank 3.8 percent to $39.42 in New York, the lowest close since July 12. Its American depositary receipts have lost 21 percent this year.

The company, based in Beijing, said 2012 net income declined 40 percent to 11.06 billion yuan ($1.8 billion) from a year earlier, according to its statement March 28. Impairment losses from equity investments jumped 140 percent to 31.1 billion yuan last year, China Life said.

Sinking Suntech

Vipshop Holdings Ltd., an online fashion discounter based in Guangzhou, jumped 70 percent last quarter to $30.37, leading gainers on the China-US gauge.

Suntech Power Holdings Co., the world’s biggest solar-panel maker in 2011, posted the steepest slide on the Bloomberg China-US gauge last quarter, tumbling 75 percent to a record-low 39 cents in New York.

The company, based in Wuxi, China, said March 21 that a local court had accepted a petition putting Wuxi Suntech Power Co., its main operating subsidiary, into insolvency, after defaulting on $541 million of bonds due March 15.

Hong Kong’s Hang Seng China Enterprises Index dropped 1.3 percent to 10,896.22 March 28, retreating from a two-week high. The Shanghai Composite Index of domestic Chinese shares was little changed at 2,236.62 March 29. The measure has lost 1.4 percent this year, while the Hang Seng is down 4.7 percent.

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