NEXT MONTH IN CHINA ECONOMIC REVIEW
The next issue of CHINA ECONOMIC REVIEW will survey the state of listed Chinese companies in the United States, with a special comparative section on the Hong Kong market. Topics will in- clude the state of the reverse merger, the role of auditors and financial service providers, and the value, if any, in over-the- counter exchanges. In this issue, please see our new Portfolio section for excepts of reports on listed Chinese companies.
do: necessity, ignorance, and bad advice. Exonerating the innocent is just as important as castigating
the guilty, and speculators should not be absolved of their re- sponsibility. Even given fraudulent statements by management, it could be argued that risk-averse investors had all the informa- tion they needed to stay away. A bit of digging into the history of many Chinese RTOs
throws up a network of small foreign auditors, investment banks, consultants and PR firms. Tese financial service providers fa- cilitated, even encouraged, unqualified Chinese companies to list. In Rino’s case, a Western auditor appears to have helped Chinese managers defraud US retail investors. But in other cas- es, particularly in the over-the-counter markets, Chinese firms were more the victims of fee-based scams than the perpetrators. Beijing too gets its share of the blame. Why are Chinese
firms not listing in their home market, where investors under- stand them better and can value them more accurately? Te queue for the Shanghai and Shenzhen bourses is long and state- owned enterprises get to jump it anyway, so entrepreneurs have little choice but to venture overseas. For some firms, an overseas exit is the only viable option
for foreign investors. But why do these companies need foreign backers in the first place? Because state-owned banks prefer lending to state-owned enterprises. It is a vicious circle. Were the regulatory environment better in China – and the
stock markets more mature – domestic firms would have no need of complex instruments like RTOs, and bad accounting would be the China Securities and Regulatory Commission’s problem, not the SEC’s.
Wealthy Chinese have traditionally gone abroad to buy most
big-ticket items – thus the campaign’s swipe at “foreign things” – but this is changing. A recent report by McKinsey & Company says Chinese consumers now make 60% of their luxury pur- chases in the mainland. But that still leaves a lot of revenue to be repatriated. Jew-
elry retailer Luk Fook generated 16% of 2010 revenue from its 500 mainland stores. Two-thirds of the company’s revenue came from 31 Hong Kong stores. Luk Fook estimates that PRC tourists account for more than half of its Hong Kong sales. Com- petitor Chow Sang Sang’s earnings tell a similar story. Even without tax reform, the luxury segment remains resil-
ient. Wealthy consumers care less about price increases, and inflation is encouraging purchases of investment items like gold. Expect any further regulation to continue focusing on the conspicuousness, rather than the consumption: The govern- ment and retailers have a common interest in bringing luxury business to the mainland.
China Economic Review • May 2011 5
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