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China Stock Investors Face Rampant Chinese Fraud

Stock-Markets / China Stocks Jan 13, 2012 - 02:03 AM GMT

By: Bloomberg

Stock-Markets

Best Financial Markets Analysis ArticleCarson Block of Muddy Waters Research spoke to Bloomberg Television's Erik Schatzker about his outlook for China.

Block said that he is "very much looking for U.S.-listed Chinese companies with which we can go long." He also said that "the chances are better than 50 percent that we'll see [a hard landing in China] in the next two to three years."


Block on whether fraud is as rampant as ever in China:

"We definitely have had a correction in the RTO universe. A lot of these companies that have been committing fraud, they're still hanging around. But nobody's really paying attention to them. So in a way, that's somewhat self-correcting. I suspect that a lot of those companies will just stop reporting. Now, if you're looking at the IPO space, I think we've maybe just scratched the surface of some of the problems among Chinese companies that listed in the U.S. via IPO. There are a number of companies that I think are wishing they could actually go private so they don't have to deal with this."

On whether he's surprised that some of the largest institutional investors are ignoring his advice:

"It's happened enough times so far that it doesn't shock me. Look, everybody is entitled to their opinion. You know, as everybody has been in the investment knows, you win some, you lose some. We don't walk on water. And we're not omniscient. So all we do is we're putting out information into the marketplace. And if people like the information and agree with it, then to date they won't buy the stocks that we've come out negatively on."

On why fraud appears to be more of an epidemic in corporate China than in the U.S.:

"It's a developing market. I'm not going to say that China is more prone to fraud than any other developing market. I just think that China is the perfect storm of a developing market that has really caught investors' attention globally. I think it's unprecedented in modern times when you have a developing market that's had so much global capital allocated toward it. So again, there will be bad actors who seek to take advantage of the hunger for Chinese investments."

On whether he would ever take a long position on China:

"We are very much looking for U.S.-listed Chinese companies on which we can go long. And I'll be honest with you about what one of the issues is. There are certainly well-intentioned managements of Chinese companies listed in the U.S., but those companies have had to compete for capital with companies that have been committing fraud. And what we fear is the problem is that those conditions have pushed managements that otherwise would not be committing fraud into fudging numbers just to compete for capital. And our position is that unless and until companies come clean and say, hey, look, we didn't want to do this but this is what we've done, we can't be positive on those companies."

On whether there are any Chinese companies that he's positive on right now:

"We're researching a couple of companies. And I really hope that they turn out to be companies that we feel have done things right."

On whether he'd invest in a Chinese stock trading in North America if he was an institutional investor with a fiduciary duty to clients:

"You have to look at a lot of really micro data points in China. They certainly want to prevent a hard landing. And nobody really knows if they're going to be able to do that in 2012 and stave it off even through 2013."

On the chances of a hard landing in China right now:

"I think the chances are better than 50 percent that we'll see one in the next two to three years."

bloomberg.com

Copyright © 2012 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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