China Stock Slump Spreads as Alibaba to Whipsaw Investors

U.S.-traded Chinese stocks tumbled the most on an intraday basis in at least four years before rebounding in late trading as the rout that’s wiped $3.2 trillion from the value of mainland equities spreads.

Chinese American depositary receipts dropped 3.3 percent at the close of trading in New York, after slumping as much as 9.1 percent. Alibaba Group Holding Ltd. fell 0.8 percent on volume more than double its three-month daily average. Inc. fell 4 percent after paring a decline of as much as 12 percent.

Stocks fell in the U.S. after the Shanghai Composite Index sank for the fourth time in five days as government measures to prop up mainland markets failed to stop a retail investor selling spree. Even after the median price-to-earnings ratio in China dropped to 55 from 108 at the height of the rally in June, valuations are more than twice as high as those on the Standard & Poor’s 500 Index.

“People have less and less confidence in the government’s ability to stabilize the financial market,” Henry Guo, an analyst at Summit Research Partners, said by phone on Tuesday. “Names like Alibaba and are, to a certain extent, an indicator in the market. The selloff in these stocks shows the level of bearishness regarding the broader Chinese market.”

Volatility Surge

Thirty-day historical volatility on the Bloomberg China-US Equity Index reached highest since 2012 on Tuesday. The gauge has fallen 17 percent from this year’s high on June 12. Sixty-seven out of 74 companies in the index declined, led by NQ Mobile Inc.’s 20 percent plunge.

“Investors are fleeing anything associated with China,” Brendan Ahern, chief investment officer at Krane Fund Advisors LLC in New York, said by phone on Tuesday. “They don’t want to have anything related to China in their portfolio. Investors are reading the risks around China, and there is a spillover effect in the U.S.-listed stocks.”

China suspended initial public offerings and brokerages pledged to buy shares in weekend measures aimed at halting the mainland rout. So-called A-shares have posted their biggest three-week slump since 1992 on concern leveraged traders are liquidating bets after valuations exceeded levels seen during China’s stock-market bubble of 2007.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the largest exchange-traded fund tracking mainland shares in the U.S., tumbled 7.6 percent to $38.21.

‘Meaningful Correction’

Investors should closely monitor the Chinese market as the situation “is getting pretty close to a buying opportunity,” Geoffrey Dennis, head of emerging-market strategy at UBS AG, said by phone Tuesday. “I suspect we are very near the bottom now. Having taken the froth out of the market, Chinese authorities are trying to get the market stabilized. We think they will succeed in stabilizing it eventually.”

Chinese markets will probably rebound before continuing their plunge, Michael Mullaney, who helps manage $12 billion as chief investment officer at Fiduciary Trust Co. in Boston, said by phone Tuesday.

“I don’t think it’s near the bottom,” Mullaney said. “It would not surprise us to see an even more meaningful correction.”