beyondbrics

Another plunge in China ‘B’ shares – the sort available to foreigners – as investors take fright at growing concerns about possibly accounting irregularities in US-listed Chinese companies.

The Shanghai ‘B’ index dropped 2.7 per cent on Friday, following a 7.9 per cent fall on Thursday, turning a sell-off into a rout. With the Shanghai main market holding up and Hong Kong down only 0.8 per cent, there’s no general loss of confidence in China. But it’s more than a little local difficulty, reviving long-standing questions about valuations and about transparency.

The latest sell-off followed a warning from the US Securities and Exchange Commission urging investors to review company filings for foreign companies that have listed in America through reverse mergers.

As beyondbrics reported, this came after a broader salvo from Martin Wheatley, Hong Kong’s former securities regulator, who said in an interview that China was “the new dot-com” of the investment world.

Investors started getting jittery earlier this month after reports appeared of SEC investigations into some US-listed reverse merger Chinese companies following allegations of accounting irregularities.

After heavy declines in recent weeks, these stocks actually rallied a little on Thursday, with, for example,  China Shen Zhou Mining Resources rising by 2.98 per cent in New York, and Toronto-listed Sino Forest by 4 per cent. But both are arond 70 per cent down from their peaks.

Meanwhile, Renren, the social network company that staged a high-profile IPO in New York last month, lost a further 12.75 per cent, falling to $9.17 – a huge 34.5 per cent on its $14 offer price.

It’s worth remembering that many of these foreign-listed companies are small and that Chinese stocks in general can be very volatile. And that Renren is a clear example of an over-hyped IPO, offered at 70 times revenues.

But, the concerns about accounting irregularities have been aired in the context of wider worries about levels of transparency in Chinese companies and the Chinese economy. Who knows what is the real level of bad and doubtful loans in Chinese banking, for example? Or even the actual pace of credit growth, given the scale of off-balance sheet lending? And what about the undisclosed ownership of some of China’s largest companies?

Also, investors remain concerned about the economic outlook.  China’s trade figures published on Friday brought some comfort to those looking for a rebalancing of the economy away from exports and towards domestic demand. As Simon Rabinovitch reported on ft.com, China on Friday published a surplus of $13.05bn in May, larger than its $11.4bn surplus the previous month, but well below market forecasts, which mainly ranged from $18-20bn.

But this is a long-term issue. Of more immediate concern is the surprising strength of imports. Imports rose 28.4 per cent in May from a year earlier, up from a 21.8 per cent pace in April.

This number will increase speculation that China will raise rates once again – and soon. Brian Jackson,  senior strategist at RBC, says: “there’s renewed speculation of a rate hike by the end of the month.”

So while the specific concerns this week have concentrated on a handful of previously-obscure US-listed stocks and on a number of high-profile IPOs, these worries have spread amid wider nervousness about the outlook for China.

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