Bloomberg News

Airlines Lead ADR Index Drop on Slowing Economy: China Overnight

April 13, 2012

Airlines led declines (CH55BN:US) in Chinese stocks traded in the U.S. on concern faltering growth in the world’s second-largest economy intensifies the risk of a global recession.

China Southern Airlines Co. (ZNH:US) and China Eastern Airlines Corp. (CEA:US) tumbled in New York after saying first-quarter profit probably fell more than 50 percent because of a slowing economy and higher fuel prices. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese stocks in the U.S. sank 0.6 percent to 103.18 by 2:42 p.m. in New York, to trade steady in the week.

The economy expanded 8.1 percent from a year earlier in the first quarter, Chinese government data released yesterday showed, the slowest pace of growth in 11 quarters and below the 8.4 percent median forecast of 41 analysts surveyed by Bloomberg. Stocks on the China-US gauge trade for 17.6 times earnings estimates, down from a valuation of as much as 22.6 times in March. Chinese policy makers have been cutting reserve requirements for banks since November to encourage lending.

“China is telegraphing to the world that despite inflation concerns domestically, slower growth will likely force the People’s Bank of China to initiate further stimulus,” Michael A. Gayed, chief investment strategist in New York at Pension Partners LLC, which advises on over $150 million in assets, including Chinese shares through exchange-traded funds, said by e-mail yesterday. People are “nervous” about riskier assets and are concerned “they are missing something in terms of overall macro risks,” he said.

China ETF Falls

China has cut reserve-requirement ratios for county-level banks by 100 basis points, or one percentage point, the state- backed Xinhua News Agency reported yesterday, citing unidentified people familiar with the matter. The amount major banks must set aside as reserves has been reduced twice by the same total amount since November, while ratios for Agricultural Bank of China Ltd. (601288)’s branches were reduced last month.

The IShares FTSE China 25 Index Fund (FXI:US), the biggest Chinese exchange-traded fund in the U.S., fell 0.2 percent to $37.53, trimming its gain this week to 1.4 percent. The Standard & Poor’s 500 Index (SPX) slid 0.8 percent to 1,376.81, and is down 1.5 percent in the week.

First-quarter profit for Guangzhou-based China Southern, Asia’s biggest air carrier by passenger numbers, probably dropped more than 50 percent the 1.24 billion yuan ($197 million) made in the first three months of last year, the company said in a statement yesterday, citing Chinese accounting standards. The decline was caused by a “slowdown in the domestic economic growth and the substantial increase of jet fuel prices,” China Southern said.

China Southern Discount

American depositary receipts of China Southern sank 3.4 percent to $22.72 in New York, extending their second weekly decline (ZNH:US) to 1.2 percent. Each ADR represents 50 common shares in the company. The ADRs traded 1.6 percent below (ZNH:US) the company’s Hong Kong stock, which was unchanged at HK$3.58, or 46 U.S. cents. The discount was the first in three trading sessions.

China Eastern, the nation’s second-largest carrier by passenger numbers, also expected net income decreased more than 50 percent in the first quarter, according to a statement to the Hong Kong stock exchange today.

ADRs of the Shanghai-based airline slid 1.6 percent to $15.59 in New York. The shares have lost 6.7 percent this week, poised for the biggest weekly decline since December. The ADRs traded at a 0.7 percent discount to China Eastern’s Hong Kong stock, reversing premiums over the previous two days.

More Easing

Data this week also showed that China’s imports in March rose seven times less than in February. The government pared this year’s economic-growth target to 7.5 percent last month, the lowest level since 2004.

Should the People’s Bank, which has kept benchmark interest rates at the highest level since 2008 since July, enact more monetary easing, it will be a boost for Chinese stocks, said Mark Williams, a London-based analyst at Capital Economics Ltd., who previously advised the U.K. Treasury on China.

“We expect four more cuts to banks’ reserve ratios this year and have penciled in two interest-rate cuts if the euro- zone crisis takes a sharp down for the worse,” Williams said by phone. “Given current valuations and given the strong signals that the government is easing policy, Chinese stock prices are likely to rise significantly.”

The Shanghai Composite Index (SHCOMP) advanced 0.4 percent to 2,359.16 yesterday, the highest level since March 22. The gauge has increased 7.3 percent this year and trades for 9.5 times member companies’ projected earnings, data compiled by Bloomberg show.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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Companies Mentioned

  • CH55BN
    (Bloomberg China-US 55 Equity Index)
    • $107.52 USD
    • 1.67
    • 1.55%
  • ZNH
    (China Southern Airlines Co Ltd)
    • $15.64 USD
    • 0.29
    • 1.85%
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