Don’t Enter the Dragonadmin / January 9, 2019
The state visit and the pompous reception of China’s president Hu Jintao to the US served to show how important the economies of these two countries are to each other.
China has the capacity to produce and American has a ready market for its products and also enough money to invest in the Chinese economy. Many American investors in a move to have a share of China’s boom have put a lot of money in China’s business both big and small.
In fact, many of these businesses are now trading on the US stock exchanges. The problem though is that some of these businesses seem to specialize in unacceptable business practice and end up ripping off investors. This practice was noted in two of the hottest Chinese stocks of 2009, Fuqi and Rhino international (Surowecki 1).
2. Fuqi and Rhino International
Fuqi and Rhino international were at one point number one and two on the top 100 list of the Investors Business Daily. An announcement made in 2010 by Fuqi claimed that the profits of the company had been overstated for a good part of the year 2009.
Ten months afterwards the company has not presented any earning statement and therefore, it is not known whether it is making a profit or a loss. Rhino, on the other hand, has received criticism that its accounting is fraudulent and that the entire company is just a sham.
It emerged that these allegations were indeed true when the company admitted that two of its manufacturing contracts never existed. This also meant that its financial statement was not reliable. The company lost its listing in NASDAQ after failing to be transparent in its financial details. So far its stock has dropped by 90% from its all-time high (Surowecki 1).
3. Chinese Firms
Chinese firms have earned a bad reputation in regard to openness of their financial details. This has forced S.E.C to carry out investigations in these stocks. It has emerged that many of these companies have two sets of revenue numbers, one is reported to S.E.C and the other is reported to Chinese authorities.
Another problem that has been noted is tunneling, which is, using outside business to swindle the company. Some executives treat companies as personal bank accounts where they just withdraw money as they wish (Surowecki 1).
4. Auditing Mistake
The regulatory system used failed to protect the interest of investors because Chinese firms have exploited it to their advantage. They manage to do this by using the reverse merger tactic whereby they buy American companies with a stock listing but few actual assets. They then change the company name to enable the company trade on NASDAQ or Amex.
Through the merge tactic the company becomes part of the listed companies without any restriction or scrutiny. After establishing their base on a stock exchange it becomes hard to be kicked off. For instance, Fuqi has not filled statements for sometime, but it has been given a chance until March. Auditing the company is also hard because some of the auditors are Chinese who only protect their own interests (Surowecki 1).
The bad publicity has done little to warn investors. Reverse mergers are increasing every year because China offers many people the hope of getting rich quickly.
Just like what happened in the US in the 19th century during the construction of the Railroads. The business was demoralizing, but because it offered prospects of enormous wealth, many people ventured into it. History is repeating itself; there may be fraudsters and swindlers targeting investors.
Surowecki, James. Don’t Enter the Dragon. New Yorker, 2011. Web. 1 February 2011.