Bets against China grow as shares hit again

An investor reacts in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province May 12, 2011.

NEW YORK (Reuters) - The selloff of Chinese names extended into Wednesday, as more investors bet against China after a rash of accounting scandals of some well-known companies.

Options activity in broad China-focused exchange-traded funds and individual names showed investors are looking for more downside as shares fell again. The iShares FTSE/Xinhua China 25 Index fund (FXI.P), one of the most actively traded China-focused ETFs, is down 9 percent since April 21, losing 1.7 percent Wednesday.

Research alleging fraud at Canada-listed Sino-Forest Corp TRE.TO nearly two weeks ago kicked off the recent decline in Chinese issues, but the damage has spread through well-known stocks and to major indexes.

"These are massacres and I won't be surprised if these stocks continue to drop," Chris Wang, founder of hedge fund SYW Capital in New York, who has been both short and long Chinese shares. "A lot of these companies trade at a P/E of 2, one is at less than cash, and still nobody cares -- everybody wants to get out."

Average short interest in about 80 Chinese companies traded on U.S. exchanges has risen sharply in 2011, climbing from 3.99 percent on January 3, the first trading day of the year, to 5.92 percent as of June 13, according to data provided by Data Explorers.

The average short interest level for the S&P 500 .SPX is 2.5 percent.

The iShares FTSE/Xinhua China 25 ETFs shows investors bought 2.37 put options for every call option as a fresh position over the past 10 days, higher than 64 percent of readings over the past year, according to data compiled by Schaeffer's Investment Research.

"There definitely appears to be some significant bearish bets on these Chinese names recently as put buying has been very heavy," said Ryan Detrick, senior technical analyst at Cincinnati, Ohio-based Schaeffer's.

The latest hit came from China-Biotics Inc CHBT.O, which said on Wednesday it will not file its annual report on time due to "serious issues" raised by its auditors. The stock was halted shortly before the close, down 8.5 percent on the day.

Over the past 10 trading days, investors have bought 6.33 puts to every call in China's New Oriental Education & Technology Group (EDU.N) as a new position on three U.S. options exchanges. That ratio is higher than 91 percent of the readings over the past year.

Popular Internet stock Baidu.com (BIDU.O) has seen investors purchase 0.94 puts for every call over the past 10 days as a new position on the same exchanges. That still means more calls are being purchased, "but nevertheless this reading is higher than every ratio over the past year, indicating extreme skepticism," Detrick said.

Steve Place, a founder of InvestingWithOptions.com, an options analytics firm, said companies such as Baidu and Sohu.com (SOHU.O) are "actual businesses," but "there has been a strong liquidation in these names because of the reputation currently garnered by less reputable names."

"This action has led to a steady rise in demand for options premium; Baidu and Sohu 30-day implied volatility are at the top of their six-month ranges."

Shares of Sohu are down 38 percent since hitting a 52-week high on April 28. Baidu has dropped 24 percent since its 52-week high, hit the same day.

The recent catalyst for the caution came on June 3, when short-selling firm Muddy Waters issued a highly critical report on Sino-Forest Corp TRE.TO, saying it had been "aggressively committing fraud" since 1995.

While the company disputes the charges, the stock has plummeted more than 80 percent from its previous levels.

Following the allegations, interest in shorting Sino has grown to the point where almost all the shares available for shorting have been loaned out. According to data from Data Explorers, around 25 percent of the shares is out on loan, making it difficult to short more.

The pressure has extended to new issues, where there is less investor interest in IPOs and corporate debt. Short interest is rising on Renren Inc (RENN.N), whose value has fallen by almost half from its IPO price of $14 in May, closing at $7.56 on Wednesday.

No Chinese company has sold a bond in the high yield market since May 26.

"The Sino-Forest controversy will certainly cause investors to be a bit more selective with respect to Chinese credits, at least for the time being," said Peter Toal, head of leveraged finance syndicate for the Americas at Barclays Capital in New York.

(Additional reporting by Doris Frankel, Clare Baldwin and Rachelle Horn at IFR; Editing by Gary Crosse and Leslie Adler)