China shares listed in US see selling

Updated: 2015-07-08 11:39

By Paul Welitzkin in New York(China Daily USA)

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Shares of some US-listed Chinese companies stumbled on Tuesday as investors appeared to flee anything connected to the turmoil of the mainland's stock market.

"I think that US investors have been bombarded over the last month with the on-shore selloff. They're (stocks are) being sold down because a lot of the US names reflect how US investors view China. The sentiment is very poor right now so they're being sold down," said Brendan Ahern, chief investment officer at Krane Shares, a US-based provider of China-focused exchange-traded funds.

Stocks in China on Tuesday extended a recent slump as the Shanghai Composite Index fell 1.3 percent, while Hong Kong's Hang Seng China Enterprises Index sank 3.3 percent. China's stock market has now lost nearly 30 percent after hitting a peak in June.

The selling of Chinese listed shares in the US included well-known names like Alibaba Group Holding Ltd, which ended down less than 1 percent after tumbling to its lowest since an initial public offering last year. Inc sank as much as 12 percent before losing 4 percent. Small caps like online recruiter Zhaopin Ltd fell nearly 6 percent.

Peter Halesworth, founder and portfolio manager of Heng Ren Investments in Boston, said the US-listed shares are feeling the effects of the Chinese selloff but he noted that the US-listed index has outperformed the Chinese mainland exchanges because valuations here are much lower.

"Chinese investors should see a great opportunity to buy their companies here in the US at a fraction of the valuations on the mainland, and with less valuation risk. I think the relative defensiveness will become clear. International and Chinese investors should take advantage of this," Halesworth said in an e-mail.

Before China's market tanked about 20 Chinese companies that were listed on US exchanges received bids to go private and then relist on the mainland later to take advantage of the soaring Chinese markets. That strategy is now a casualty of the stock market selloff.

Ahern said small caps had more of a premium because they had the option of relisting on the mainland. "Obviously the feasibility of doing that now is very low," he added.

"For those US companies that are going private, they will probably abandon their plans because there's no more valuation arbitrage to take from delisting on one market and relisting on another market," noted Jack Liu, senior vice-president of Chardan Capital Markets in New York.

"When the market is really booming and everyone is underestimating the risk and the hustle that's involved in going private and relisting on the domestic market, but now people are becoming more realistic and they are taking another look. When they take another look at the risks and fluctuation in the process, they will of course have a different view."

Liu said in an interview that the US used to be one of the best markets for Chinese (stocks) "and I think they will be looking at the US again, but probably not really in the near term. At this point, everyone is focusing on their loss in China and some of the best companies are dealing with private equity firms in China who have been forcing them to get public in China. They have their own problems to deal with and before they have some clarity and comfort in the domestic market, I don't think they're going to venture into a totally different market or plan as they had previously wanted to," he said.

In an effort to stabilize the Chinese markets, several measures were implemented that including caps on short selling, pledges by pension funds to buy more stocks and the suspension of initial public offerings to stabilize the Chinese markets.

"Overall I think the government has done a good job," Ahern said. "These short-term measures are warranted."

"Markets aren't easy to administrate, and governments are always second-guessed for intervening in stock markets. Even the US during the Lehman crisis banned short-selling of major financial stocks, and it was roundly criticized. The most difficult issue is how to allow shareholders of smaller stocks in China to sell when there's an automatic suspension on trading with a 10 percent drop in price. A mechanism to allow those on margin in these stocks to exit should be explored," said Halesworth.

"China's leadership has doubled down on its efforts to prop up equity prices," said Mark Williams of Capital Economics in a New York Times report. "There is a good chance that the market rescue efforts are seen to be a failure in a few months' time."

"The bubble is bursting," and predicting the bottom is anyone's guess, Stephen Roach, a senior fellow at Yale University and the former chairman of Morgan Stanley Asia, said Tuesday on old CNBC's "Squawk Box" program.

Bargain hunting after the plunge in Chinese stocks would be like "catching a falling knife," said Roach.

Amy He contributed to this report.