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China foreign listings dogged by scandal

Martin Mittelstaedt The Globe and Mail 06/07/2011 00:48
China foreign listings dogged by scandal - Business - China - Sino-Forest

The allegations that Sino-Forest Corp. TRE-T inflated its revenues and assets are drawing attention to one of the most exotic and treacherous sectors of the equity market – the hundreds of Chinese companies that trade on North American stock exchanges.

There are about 200 companies with listings in the U.S. and Canada that have almost all of their operations in Asia, with a combined market capitalization of approximately $50-billion, according to estimates from the University of Toronto’s Kevin Mak. Lately, however, their value has been shrinking amid a cloud of scandal.

Investors may have lost more than $10-billion in recent months as several of these companies have been exposed as frauds or discovered to have questionable accounting, said Mr. Mak, manager of the financial research and trading lab at the university’s Rotman School of Management.

In the case of Sino-Forest alone, more than $3-billion in paper wealth was lost in the space of two days last week – even though the allegations were brought against it by an admitted short-seller who lacked hard evidence.

Among the Chinese companies that have recently taken tumbles are Duoyuan Printing, whose trading has been suspended by the New York Stock Exchange after the company failed to bring regulatory filings up to date, and China Electric Motor, whose trading has been halted in the U.S. since late March, apparently for similar reasons. Both stocks have tumbled sharply since last year.

Most of these Chinese companies haven’t done conventional initial public offerings as a first step to attract investors. Instead, they have followed a backdoor route to North America by taking over nearly defunct shell companies whose only valuable assets were stock market listings.

This manoeuvre, known as a reverse takeover or RTO, means the Chinese acquirers aren’t subjected to the full due diligence requirements required of initial public offerings, making it easier for unscrupulous operators to get listings.

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