Yanzhou Gap at Five-Year High Highlights Holiday Tumble

Mainland China stocks resume trading after missing out on a three-day tumble in emerging equities that sent Brazil’s Ibovespa into a bear market and left Chinese shares traded in Hong Kong at the cheapest level versus the world since 2003.

“Chinese shares are likely to drop when markets reopen, though the domestic market goes to its own beat,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which manages $700 million in assets, said in a telephone interview from Lisle, Illinois.

The MSCI Emerging Market Index lost 3.2 percent and the Bloomberg China-US Equity Index dropped 2.9 percent since Chinese markets closed for a three-day holiday, with the Ibovespa becoming the first benchmark from the biggest developing countries to fall at least 20 percent from a peak. The Hang Seng China Enterprises Index closed June 11 at an eight-month low, dragging its valuation to 1.2 times net assets, the lowest ratio versus the MSCI All-Country World Index since November 2003. Hong Kong also reopens today.

The tumble, spurred by concern that the Federal Reserve may withdraw monetary stimulus, followed China’s May economic data showing industrial output grew less than forecast, factory-gate prices slumped and export gains were at a 10-month low. American depositary receipts of Yanzhou Coal Mining Co. trailed the Hong Kong stock by the most since 2008, while four days of declines in Cnooc Ltd.’s ADRs created the first discount versus Hong Kong in a week.

Growth Estimates

The slump this week has driven companies on the China-US gauge to trade at 12 times estimated profit on average, the lowest level since May 3, data compiled by Bloomberg show.

China’s economy will expand 7.5 percent this year, Skandinaviska Enskilda Banken AB predicted, joining Barclays Plc. and at least two other firms in cutting growth projections after May industrial production data trailed estimates. A Bloomberg News survey last month showed a median projection for a 7.8 percent growth for the year, down from an 8 percent forecast in April.

Twelve-month non-deliverable yuan forwards strengthened 0.13 percent against the U.S. dollar to 6.2675 yesterday in New York, rising the most in a week, after the currency was little changed last week at 6.1335 per dollar in Shanghai before the holiday.

ADRs of Yanzhou, China’s fourth-largest coal mining company, lost 12 percent this week to $8.95, the lowest price since April 2009. They traded 8.6 percent below Hong Kong shares, the widest discount since December 2008.

Energy Companies

Cnooc’s ADRs slid 0.7 percent yesterday to $169.01, taking the loss to 3.8 percent this week. They traded 0.7 percent below Hong Kong shares, the first discount in five days.

Material and energy industry groups are the worst performers among 10 industry groups on the MSCI China this year, as China Coal Energy Co. and Yanzhou slumped more than 40 percent. Zijin Mining Group Co.’s forward price-earnings ratio has dropped to a four-month low after the stock tumbled 40 percent in 2013.

Commodities have dropped this week, with the Standard & Poor’s GSCI Spot Index of 24 raw materials slipping 1.2 percent to 623.62 in New York.

Sina Corp., China’s biggest Twitter-like Weibo service, sank 7 percent to $55.85 this week, while Baidu Inc., owner of China’s most-used online search engine, slid 5 percent to a one-week low of $97.51.

ETF Trading

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., fell 0.7 percent yesterday in New York to $34.59, extending its slide into a fourth day. The Standard and Poor’s 500 Index tumbled 0.8 percent to 1,612.52 as investors weighed economic reports and the effect of rising bond yields on equities.

Chinese shares traded in Hong Kong posted the longest losing streak in 17 years before closing yesterday for a holiday. The Hang Seng China Enterprises Index lost 8.8 percent in the 10 days to June 11.

While Fidelity Investment Management Ltd. and JPMorgan Asset Management say bargains are emerging among Chinese equities in Hong Kong, Manulife Asset Management and State Street Corp. are wary of stocks that have now erased all their gains since Xi Jinping took over as leader of the Communist Party of China in November.

Stock Outflows

Some foreign investors pulled funds from Chinese equities since Fed Chairman Ben S. Bernanke said the central bank could ease its stimulus policies should the U.S. employment outlook show sustainable improvement. Investors withdrew $834 million from Chinese stock funds in the week to June 5, Citigroup Inc. said in a June 7 report, citing EPFR Global data.

The drop in Chinese shares is “partly due to perceived poor data from China, and partly due to low trading volumes,” Oberweis’s Papp said. “China, as well as the broad emerging market, isn’t doing anything with monetary policy to create short-term growth, driving funds to developed markets with monetary easing policies.”

The Hang Seng China gauge’s 10-day decline dragged its price-to-projected 12-month earnings ratio to 7.3 times, the lowest level since July and less than the five-year average of 10, data compiled by Bloomberg show. The MSCI All-Country World Index trades for 13.5 times profit.

‘Still Overweight’

While Fidelity had sold some of its Chinese holdings, its fund managers are generally “still overweight” on equities in China and Hong Kong, according to Catherine Yeung, the firm’s Hong Kong-based investment director. Renewable-energy shares and companies that benefit from discretionary consumer spending are “attractive,” she said, without being specific.

“There are a lot of opportunities from a valuation point of view,” Yeung said by phone on June 11. “Data is mixed but from a stock selection point of view, we are finding some very good news.”

China’s industrial production expanded 9.2 percent in May, compared with a median estimate for a 9.4 percent increase, the statistics bureau reported on June 9. May exports rose 1 percent from a year earlier, down from 14.7 percent in April, while imports dropped 0.3 percent from a year earlier. The median estimates of analysts were for a 7.4 percent export growth and a 6.6 percent import gain.

The reports add pressure on Xi and Premier Li Keqiang to shore up growth that unexpectedly slowed to a 7.7 percent rate in the first quarter. While the figures boost the case for easing monetary policy or increasing spending, the government’s room is limited by rising home prices and overcapacity in an economy where lenders’ bad loans have risen for six straight quarters.

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