THE HOUSE VIEW
Wheat from chaff The long-
rumored SEC investigation of US-listed Chinese
companies is formally
underway, and overdue. But it should not be overdone
T
he US Securities & Exchange Commis- sion (SEC) surprised no one on April 6 with the announcement of a formal inves-
tigation into Chinese firms listed on US exchang- es. Luis Aguilar, the SEC commissioner, said spe- cial attention would be paid to “back door” listings, also known as reverse takeovers (RTO). Te news was shrugged off by the markets, which had al- ready priced in the rumors that began circulating last December, but the investigation may yet cause an uproar. In an RTO, an operating firm injects its assets
into a defunct shell company that retains a valid ticker symbol, effectively listing the private com- pany without requiring it to pass the more strin- gent auditing and disclosure requirements applied to initial public offerings. Since 2007, over 300 Chinese companies have listed in America this way, with 80 or so making it onto the main boards. While there is no reason to doubt the repute of
the majority of these firms, in the last six months several have become embroiled in controver- sies over suspect accounting standards. Tis has sparked concerns that the China RTO phenom- enon is little more than a variation on the Chinese product scandal theme: fake companies painted to look like the real thing. Recent investigations by China Economic
Review have thrown up evidence of inflated rev- enue statements by Duoyuan Printing and China Biotics; the former is now relegated to trading on the over-the-counter exchanges and the latter has seen its share price nearly halve. Te list of other companies similarly accused is
long and undistinguished: China Century Drag- on Media, Orient Paper, China Green Agricul-
FILING CHARGES: The regulator has some questions
ture and China Natural Gas. However, perhaps pride of place should go to
environmental equipment manufacturer Rino In- ternational, which was forced to delist last year after an investigation by short seller group Muddy Waters revealed the firm had fabricated sales con- tracts, thus overstating revenues by nearly US$178 million. In Rino’s case, investor fraud appears to have been an explicit management goal: After the company raised US$100 million from investors, a manager promptly borrowed US$3.2 million of it to build a luxury home in California. Although the mud appears to be sticking to
Brand China, the SEC must proceed carefully in its investigation. Trowing an undignified tantrum will benefit no one. While it is obvious that there were some very bad apples in the RTO barrel, there are also companies that listed through re- verse mergers for the same reasons Western firms
Dirty money: Beijing’s challenge to luxury retailers is only skin-deep
This spring, hedonism, aristocratic lifestyles and the worship of foreign things are out – at least on Beijing billboards. The capital has banned outdoor ads promoting these and other practices that are not in keeping with “building a civilized spirit.” The purge presumably aims to quiet dissat-
isfaction with inflation, which makes everyone feel poorer, as well as the wealth gap between the super-rich and the lower classes. The problem goes far beyond a few sexy
ads: Consumer confidence slumped to an all- time low in February. And in March, jittery con- sumers cleared supermarket shelves of soap and detergent following news that Unilever,
4 China Economic Review • May 2011
The government has made reducing social inequality a key theme in the 12th Five-Year Plan, but Beijing is far from launching any real crackdown on luxury
Procter & Gamble, Guangzhou Liby Enter- prise Group and Nice Group would hike prices. To ensure stability for the next group of
leaders who will take control in 2012, the gov- ernment is targeting social inequality in the 12th Five-Year Plan. But Beijing is far from launching a real crackdown on luxury. Instead, the government is making plans
to support luxury sales on the mainland by lowering taxes on some products, like cos- metics. In a bid to boost tourism, the south- ern island of Hainan, occasionally referred to (generously) as “China’s Hawaii,” began offer- ing mainland tourists duty-free purchases of up to RMB5,000 (US$762) in April.
Phototex
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