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Chinese ADR Rally Hits the Wall

Shares plunge Tuesday after some huge gains in 2003.

The recent rally in Chinese stocks traded on U.S. markets hit the wall Tuesday.

A downgrade by HSBC of


(PTR) - Get PetroChina Company Limited Report

helped spur the declines. Another trigger was industrial company

China Yuchai's

(CYD) - Get China Yuchai International Limited Report

removal from a top 100 list compiled by

Investor's Business Daily

on Monday, according to Jason Diamond, director of research at CapStone Investments.

PetroChina shares were falling $6.08, or 9.8%, at $56.02, while China Yuchai was lately down $1.89, or 6.3%, at $28.24.

Resin and plastic producer

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Sinopec Beijing


and investment company

China Fund

(CHN) - Get China Fund Inc. (The) Report

were also down. Sinopec lost $2.76, or 11%, at $22.25, while China Fund was off $3.75, or 7.8%, at $44.10.

"There are very few Chinese plays and a lot of people who want to play them," said Diamond, who holds no shares and whose company does not do any investment banking. "That kind of supply and demand can get these stocks moving in different directions."

Petroleum company PetroChina was cut to add from buy on Tuesday by HSBC, which cited possible safety violations at its parent company CNPC, after an explosion at a gas well last month killed 250 people.

PetroChina's stock tripled in 2003 and gained another 10% on the first trading day of 2004, but HSBC believes the gas well explosion and profit-taking "will puncture the momentum of the rally."

Tuesday's declines followed some other astounding gains in 2003. China Yuchai shares, for instance, rose 616% last year, reaching a record closing high of $36.45 in November. Sinopec shares have nearly doubled since December with the stock reaching a six-year closing high of $25.01 on Jan. 5. And China Fund's shares hit their highest mark since December 1993 on Jan. 5, closing at $47.85.

Smith Barney Citigroup American Depositary Receipt analyst Kathleen Boyle isn't surprised by the fall in prices.

"They have had some phenomenal gains," she said. "They were all getting pushed higher on optimism about the prospects for the Chinese economy."

As a result, any kind of news will push them over the edge, Boyle said.