-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
By John Foley
HONG KONG, June 9 (Reuters Breakingviews) - Sino-phobia has replaced sino-philia in global stock markets. Chinese companies listed abroad suffered heavy selling on June 8 amid mounting fears for the credibility of their accounts. Sino-Forest TRE.TO, the forestry group listed in Canada, has shed 72 percent of its value since June 2, when a short-seller claimed it had fudged key numbers -- despite a company denial. Software maker Longtop LFT.N is being probed by regulators after its auditor and finance director quit. Taomee (TAOM.N), an Internet stock that's just taken a U.S. listing, admitted to flaws in its internal controls. Similar stories have been around for months. But the penny has finally dropped.
Some correction was needed. Exuberant investors have bid up Chinese companies without discrimination or disciplined analysis. It's as if the risk premium had disappeared. Social network Renren's (RENN.N) shares surged as much as 71 percent on their first day of trading in New York. They are now 25 percent below the float price. And many of the companies now under scrutiny, Sino-Forest included, were "backdoor" listings that reversed into forgotten quoted vehicles in Toronto and New York, thus avoiding some of the rigours of the traditional IPO process.
Chinese companies regularly understate their assets and earnings in local governmental filings. Contracts are less important than "understandings". But questions go beyond the corporate sector. Banks report low bad debts, yet the government is seemingly mulling a $400 billion bailout of the lending system. Official loan growth is slowing, yet tales of reckless informal lending suggest the opposite. The government doesn't exactly set the right tone: even some senior state economists don't take figures like GDP or consumer prices at face value.
Investors used to treat these issues as acceptable foibles in the headlong pursuit of exposure to China's equity story. Now they rightly worry what they see may not be what they get. Some are hedging their bets -- hence recent unexpected movements in Chinese credit default swaps and currency futures. Distance makes the unease worse for faraway investors.
The next stage may be wider China aversion. If that happens, some companies could face a capital drought. While China has mountainous savings, they don't flow freely to companies who need financing. Banks still lend to "favoured" sectors first. Many real estate developers, facing restrictions on lending, have gone to Hong Kong to issue bonds, making them vulnerable to foreign sentiment. And many young companies still lean on foreign private equity for medium-term financing. It would be bad news for them, and for China, if investors turned a cold shoulder.
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-- Shares in Chinese issuers fell on overseas markets on June 8 as fears spread over alleged accounting misdeeds at a number of small listed businesses. At least one broker said it would prohibit clients from borrowing money to take leveraged positions on certain Chinese stocks.
-- Sino-Forest, a Chinese forestry company listed in Toronto, fell 72 percent since June 2, when a report from hedge fund Muddy Waters accused it of falsifying data on its plantations and revenues. The company refuted the claims, and said it had appointed a three-person independent commission of non-executive directors to investigate, as well as hiring accountant PricewaterhouseCoopers.
-- Renren, a Chinese social networking website, fell 13.6 percent amid the sell-off. The company listed in May, but shortly beforehand had to revise one of its key customer reporting metrics. The stock, which floated at $14, closed at $10.51 on June 8.
-- Taomee, another Chinese internet company selling shares in New York, priced its stock at the bottom of the indicated price range on June 8, having said that its auditors found "significant deficiencies" in its internal controls over financial reporting.
-- Longtop Financial Technologies, a Chinese financial software maker, was halted in trading on the New York Stock Exchange on May 16 after its chief financial officer and external auditor resigned, amid questions over the company's cash balances. The Securities and Exchanges Commission is investigating Longtop, which has said it plans to co-operate fully with the regulator.
-- Reuters story: Chinese stocks in US hit as brokers wary of lending [ID:nN08279183]
-- Reuters story: China's Taomee sees "control" gaps as US IPO prices [ID:nN0837797]
-- Reuters story: China's cold shoulder paves way for more shady US listings [ID:nL3E7GV1VQ]
-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [FOLEY/]
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