After a two year stalemate, China and the US signed a memorandum of understanding on enforcement cooperation last Friday, opening the possibility of US regulators gaining access to the audit papers of hundreds of Chinese companies listed on US exchanges. The agreement was signed between the US Public Company Accounting Oversight Board (PCAOB) and China’s finance ministry and its Securities Regulatory Commission (CSRC).
What are its ramifications?
Just when you thought you had heard the last of Chinese reverse mergers, along comes another accounting scandal that puts them back in the spotlight again.
The victim this time? Caterpillar, which on Friday stunned the market with news that it would have to take a $580m write down in the fourth quarter after it unearthed accounting irregularities at ERA Mining Machinery, a Chinese company that it acquired last June for $886m.
Things are heating up between the US Securities and Exchange Commission and some of the US’s leading accounting firms.
The SEC on Monday charged the Chinese affiliates of Ernst & Young, PwC, KPMG, Deloitte Touche Tohmatsu and BDO with violating US securities law after the five firms allegedly refused to turn over audit work papers and other documents related to nine Chinese companies that are currently being investigated for potential accounting fraud.
It is not a good week to be a promoter of US-listed Chinese companies.
First Nasdaq halted trading in Tibet Pharmaceuticals and Global Sources. Then Ernst & Young resigned as Sino-Forest’s auditor. And now a Chinese pork processing company has become the focus of a US Securities and Exchange Commission investigation on insider trading.
Things keep getting worse for Sino-Forest, the Toronto-listed Chinese forestry company that filed for bankruptcy protection last week.
Ernst & Young resigned as Sino-Forest’s auditor on Thursday, and the Toronto stock exchange announced that the company’s shares will be delisted next month.
By Alexandra Stevenson
When considering the risks of investing in Chinese companies, Sino-Forest typically comes to mind. Investors got burned for not probing its opaque accounting. But there is also a fully-disclosed accounting detail that investors in Chinese companies would do well to get acquainted with.
It’s called variable interest entity (VIE).
Step by step, Sino-Forest is moving closer towards bankruptcy or a restructuring of its $1.8bn of bonds.
On Monday, the scandal-plagued Chinese forestry company announced it had received notices of default from the holders of its bonds due 2014 and 2017 after failing to publish its third-quarter results, which were due last week.
For investors in Sino-Forest, the Chinese forestry group fighting allegations of fraud, things are going from bad to worse.
Late on Monday, the Toronto-listed company said it would miss an interest payment on its debt and was unable to say when it would be able to publish its earnings statement, which would put it in default on $1.8bn worth of bonds.
The company’s bonds fell sharply on Tuesday as investors continued to abandon what was once a darling of the Canadian stock market and one of the biggest issuers of debt the Asian bond market.
Muddy Waters, the short-selling group famous for triggering the collapse in the share price of Toronto listed Chinese company, Sino-Forest, was at it again last week.
US-listed shares in the Shanghai advertising firm, Focus Media, dived last Monday following the publication of a less than flattering report by Muddy Waters, which alleged it had overstated the size of its advertising network.
As investors have turned cautious and demand for technology IPOs has shrunk, these are great times for short sellers. Over the past year, firms like Muddy Waters and Citron Research have attacked one Chinese firm after the other with accusations of accounting fraud or other misrepresentations of fact, in the process bringing down some companies such as Longtop Financial.
But the attackers have their weaknesses as well. This week, Andrew Left, the short seller behind Citron Research, went for Qihoo 360, the Chinese internet security software maker. In a note published on Tuesday, he called Qihoo “the most overvalued and misunderstood Chinese Internet Stock” and set a target price of US$5 – 75 per cent below its current trading range.
Short-sellers beware: shares in Toronto-listed Silvercorp Metals, the Chinese silver miner accused of fraud, are up more than 16 per cent in the past two days after it said earlier this week that KPMG Forensic published a report backing its financials.
From Jim Chanos, best known for his strident bearish call on China to Muddy Water of Sino-Forest short-selling fame, shorting China has become something of an industry sport within the fund investment community over the past year.
But are those shorting Chinese stocks about to get their fingers burnt?
Société Générale certainly thinks so. According to analysts at the French bank, China is now “The World’s Most Crowded Short” and Chinese stocks are on the verge of a “massive short squeeze”.
Sino-Forest, the Chinese forestry company fighting allegations of fraud, is heading for a calamitous default on its $1.8bn of international bonds.
That, at least, is the verdict of the bond market.
Well this news didn’t come as a surprise, but we almost missed it: Sino-Forest on Sunday announced the resignation of its chairman and CEO. The announcement came quiet as a mouse, after a very confusing news day for Sino-Forest investors at end of the trading week.
On Friday the Ontario Securities Commission ordered shares to “cease trading” on the Toronto Stock Exchange and called for the resignation of senior executives at the company. Later that day the OSC reversed its order, stating it does not have the power to make such an order without holding a hearing first. Excerpts from Sunday’s statement below the page break…