Chinese accounting: Chinese regulators aren't to blame for the recent spate of accounting shenanigans abroad, but that shouldn't stop them from acting. The broad sell-off of Chinese stocks shows a few bad apples can spoil investors' confidence in all things made in China. Risk aversion could even hurt China's exports and overseas investment plans. Investors are punishing all Chinese companies as if they were the same.
The iShares FTSE/Xinhua China 25 Index fund, which is made up of China's blue chips traded in Hong Kong and New York, fell about nine per cent in the past two months. Capital may dry up for Chinese companies as big investors retreat. Hedge fund manager John Paulson has sold his entire stake in Sino-Forest, a Chinese forestry company listed in Toronto, which has lost about 90 percent of its value since allegations of fraud. Huge short interest in New York and Hong Kong indicates Chinese stocks may have more room to fall. Investors are also turning a cold shoulder to new stocks from China.
Google-backed Internet video company Xunlei postponed its US initial public offering. Sany Heavy Industry could delay its $3 billion IPO in Hong Kong, according to IFR Asia. The next victims may be Chinese exports and outbound deals. Exporters depend on China's reputation for checks and standards. Recall the confidence crisis in 2007 when toymaker Mattel recalled millions of toys made in China because they contained toxic lead paint. US politicians may propose more scrutiny on Chinese outbound acquisitions.
Board directors of US-listed Chinese companies may become less willing to back management buyout proposals for fear of being accused of selling companies on the cheap. In response to 2007's toy recall, China vowed to increase supervision, stop the export of the goods in question, and punish those involved in the product safety scandal. Confidence returned. Something similar may now be needed with stocks.
True, China's regulators already set a high bar for domestic listings, and it's hardly their fault if US counterparts didn't do so too. But a Beijing intervention may be necessary to ensure markets don't start treating ‘Made in China’ as a warning rather than an advertisement.