Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
Gold Price Not Ready for a Final Intermediate Cycle Low - 31st May 16
EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - 31st May 16
Gold - Mr. Cool Cucumber is starting to Sweat - 31st May 16
AMAT Chirps, b2b Ramps, Yellen Hawks and Gold’s Fundamentals Erode - 31st May 16
Stock Market Re-Testing Overhead Resistance - 30th May 16
David Cameron Questioned on Out of Control Immigration at TEN TIMES Conservative Election Pledges - 30th May 16
Bitcoin Price Skyrockets And Is Now Up More Than 100% This Jubilee Year - 30th May 16
This Is Not The America My Parents Immigrated To In 1957 - 30th May 16
“Debt, Not The Economy, Reaches Escape Velocity” With Graham Mehl - 29th May 16
EU Referendum, Black Vote LEAVE or REMAIN? Which is Worse for Racism for Britain's Ethnic Minorities? - 29th May 16
Billionaire Gross: Jubilee Debt Relief as Prelude to New Global Economic Order - 29th May 16
Wargaming North Korea - Assessing the Threat - 29th May 16
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Can Investors Really Trust Chinese Stocks?

Companies / China Stocks Dec 14, 2012 - 12:15 PM GMT

By: Money_Morning

Companies

Martin Hutchinson writes: At first glance, Chinese stocks that trade on U.S. exchanges are dirt cheap. But the truth is you need to take a long hard look before you leap.

Behind the curtain you could find that they've cooked the books.

In fact, last week, the U.S. Securities and Exchange Commission accused the Chinese affiliates of "the Big Four" auditing companies of breaking securities laws after they refused to produce the "work papers" related to accounting fraud investigations at nine Chinese companies.


Naturally, they all cried foul.

According to auditors from Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers producing this paperwork is illegal under Chinese law-hence the stalemate.

It's a dispute that highlights the cultural clash between the Chinese need for secrecy and U.S. anti-fraud efforts that demand more transparency.

The bottom line in this case, though, is quite a bit more simple: If there's no way to ensure the accounting practices at Chinese companies are candid, investors should completely avoid them.

Whether it's here or abroad, you should never invest in anything where you can't trust the numbers.

Chinese small caps are just the latest example now that this brewing accounting scandal seems to be coming to a head. The SEC has filed fraud allegations against 40 individuals or companies.

How the Tables Have Turned On Chinese Stocks
The boom in Chinese companies listing on the U.S. markets began in 2006, and at first appeared attractive to both sides.

China was the world's greatest growth economy. With lots of fast-growing small companies, U.S. investors saw Chinese companies as a way to tap into that growth. Valuations were attractive, and by 2010 over 600 Chinese companies had done a U.S. financing, either through an IPO or through a "reverse merger" into a U.S. shell company.

Some of these companies, such as Baidu Inc. (Nasdaq: BIDU), the Chinese equivalent of Google, appear to have been solid. Indeed, Baidu's net income is expected to rise about 60% this
year.

What's more, even with the accounting scandals, the total market capitalization of Chinese ADRs remains close to $1 trillion.

But once the first small-cap Chinese company, Sino Forest, was shown to have falsified its accounts, market doubt spread like wildfire and the share prices of many small Chinese companies collapsed.

Since then, 50 China-based companies have been delisted from U.S. exchanges, whereas others can be bought for a small fraction of net asset value and at a 1-2 times multiple of earnings -- if the net asset values and earnings are correct.

When trouble first appeared, investors relied on the companies' auditors - after all if KPMG, Deloitte or one of the other "Big 4" accounting firms had audited the figures, they could be assumed to be correct, right?

That meant the doubts were concentrated on Chinese companies with second-tier auditors, and you had the amazing spectacle of Chinese companies chasing round after new auditors every year, with each auditor resigning as soon as he faced the daunting task of preparing accounts that would satisfy the SEC.

Who Can You Trust?
However, it has become increasingly clear that "Big 4" accountants are little protection to the Western investor.

While their Chinese affiliates are nominally in partnership with the rest of the global practice, in reality they are subject to political pressures in China that are impenetrable to outsiders.

As the recent hoo-hah has shown, when they are given the choice between offending some bigwig in China's Communist Party hierarchy and offending the SEC-- which can do little to force compliance provided the auditors do not personally set foot in the United States-- even the best Chinese auditor will always choose his local business.

The problem is that China itself remains a pretty corrupt society, ranked 80th of 176 countries on Transparency International's 2012 Corruption Perceptions Index.

While this still ranks it well ahead of India (94th) - let alone Russia (a startling 133rd) - it indicates the country is a difficult place to do business, and that distant U.S. investors may rank bottom on the list of forces which have to be placated.

China is not likely to allow the SEC proper access to the work of Chinese auditors - for one thing, a matter of sovereignty is involved.

Hence, in the long run we may well find Chinese companies de-listing from the U.S. or perhaps engaged in leveraged buyouts to eliminate the international investors. After all, if an honest and profitable company finds its shares consistently trade at half net asset value or less, there's not much to gain from a U.S. listing.

The Smart Way to Invest In China
For us as investors, that makes Chinese stocks too risky-particularly the small-caps.

Even deals sponsored by major houses, such as China New Boron Corporation (Nasdaq: BORN) introduced in 2010 by Goldman Sachs, can find themselves trading at a quarter of their issue price, even though based on the published figures the business has prospered mightily.

With the ubiquitous short-sellers active, even a completely honest Chinese company with good operations is unable to give its investors a solid holding.

The solution is to buy what my colleague Keith Fitz-Gerald calls "glocals" - global companies which have established themselves in China and built a business that offers exciting growth in the country's huge potential market.

Companies such as Yum! Brands (NYSE:YUM) give us a route to prosper from Chinese growth without worrying about Chinese accounting. You can be quite sure a company like Yum is on top of any problems in its Chinese business.

Globally, the Chinese accounting problem illustrates an important point.

Even when corrupt emerging markets appear to offer exciting opportunities, their corruption may prevent foreign individual investors from obtaining the returns they deserve.

Within the emerging market universe, you're best off concentrating on countries in the richer parts of East Asia, like Singapore, where growth is good and local standards of integrity are high.

Source :http://moneymorning.com/2012/12/14/can-you-really-trust-chinese-stocks/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife