Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Gold And Silver – Elite Supernova Death Dance In PMs? - 1st Nov 14
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Free Forex Forecasts

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

© 2005-2014 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

Free Report - Financial Markets 2014