China bears: getting aggressive?

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By Alexandra Stevenson and Stefan Wagstyl

Can we hear the sound of the bears trampling over Chinese shares?

The main Shanghai Composite index is down 10 per cent since its recent peak in April, which is bad enough, given that the general shift away from risk has seen emerging market stocks fall only 4 per cent from their recent highs.

But Shanghai’s dollar-denominated China B index, which tracks 53 stocks that foreigners can own, is down around 20 per cent from its 2011 peak, with a whopping 8 per cent drop on Thursday. That comes a day after Martin Wheatley, Hong Kong’s former securities regulator, warned in an interview that China was “the new dot-com” of the investment world. What is going on?

As well as the China-listed B index sell-off, foreign-listed Chinese companies are plunging.

In the wake of an IPO surge which has seen 35 Chinese companies list abroad in 2011 (a three-year high), seven out of 15 which raised US$100m or more are now underwater. Shares in Renren, the highest-profile foreign-listed IPO, rose sharply in its New York debut, but are now down 25 per cent on the offer price, including a 13 per cent drop on Tuesday.

It’s not just the foreigners who are getting wary. As ft.com reported, on Tuesday a mainland Chinese IPO was pulled for lack of investor interest – an unusual move.

Nanning Baling, a small producer of automotive radiators and heaters, pulled its planned IPO on the Shenzhen Stock Exchange. The company had planned to raise Rmb300m ($46m) but weaker car sales and a general industry slowdown made the company’s planned debut a hard sell.

Fraser Howie, a Chinese stock market expert, told the FT’s Patti Waldmeir on Wednesday: “This was an accident waiting to happen. We have seen IPO performance get weaker and weaker over at least a year, and participation in IPOs fall off further and further.

“In their heyday, over 4m accounts would subscribe to a single IPO; but a recent ChiNext listing only drew applications from 8,000 accounts.”

Waning investor appetite for Chinese stocks also comes as a growing number of overseas-listed Chinese companies are coming under investigation for accounting discrepancies, and some hedge funds are shorting these companies.

Even the well-known investor Jim Chanos has expressed his regret at missing the chance to short these companies.

But the sell-off is too broad to be blamed on a few suspect accounting statements. It seems that risk-off investors have decided – as Wheatley said – that valuations have just gone through the roof. On price/earnings terms, the Chinese market as a whole isn’t widly over-valued, trading on a forward p/e of 11 versus an EM average of around 10.5. The Shanghai B shares index is on 17 times earnings, which is higher, but dead in line with the overall Shanghai Composite index. So no general over-valuation there.

Qin Wei Wang, ecoonomist at Capital Economics, says: “If you look at historical data it would suggest equity prices are not that over-valued. My guess is that because the B share market is quite small, individual share moves could make the market volatile.”

But individual Chinese companies clearly are over-hyped. Renren, for example, was sold at 70 times revenues. A dose of reality was long overdue.

Analysts are also divided about Chinese policymakers’ ability to slow the economy a bit, limit inflation and control potential bubbles in some parts of the property market. With so much uncertainty around, investors are wise to take stock of what they hold.

Related reading:
Prime catch? 2011 China IPO list, beyondbrics
Is China bubble now an anti-China bubble?, beyondbrics
China “fraudcaps”: how to profit, beyondbrics
China small caps are ridiculously risky, Business Insider
Chinese Stocks in U.S. Plunge on Accounting, Bloomberg
Why Jim Chanos is short China, FT Video
Chinese internet IPOs: Icarus syndrome, beyondbrics

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