While the glory of a successful listing has yet to be fully enjoyed, these Chinese companies were already thrown to face harsh criticisms, auditors' resignations, questioned, dumped, delisted, and even sued. Today, a quick glance around the sidewalks of Wall Street, one will not be surprised to find, aggressive research institutions and short-selling fund houses scrounging for business, as well as the somehow unfriendly auditors or unyielding authorities coupled with a few dismayed investors being tied up in unsatisfying deals, all pointing to one thing - these Chinese companies seem to have been doomed for a hopeless downward spiral.
Incessant reports challenging the financial conditions of these over daring short-selling companies served as the catalyst to a domino effect.
Being awed by the various suspicions and challenges from professional as well as unprofessional parties, many Chinese companies have failed to promptly react to this catastrophic drift, meanwhile, an increasing number of professional intermediaries opted for divorce from their principals, leaving these Chinese companies as the prey of short-selling all of a sudden. Since February, around 40 Chinese companies either admitted to have problems in auditing, or were suspended from trading by the SEC (or by their respective listed exchanges for the same or similar problems). On the other hand, lawsuits launched against these Chinese companies loom behind the scene, with the number now accruing up to nearly 20 such companies from the beginning of this year, which is the equivalence of a quarter of securities class actions in the United States.
In retrospect, ranging from Anthony Bolton's China Special Situations Fund to James Chanos' chilling story about bubbles in China's Real Estate industry, past attempts of short-selling China as a whole seemed not to have been put to a halt and accordingly, it would not stop until they discover the particular shortcomings associated with these overseas-listed Chinese companies.
Confronted by this challenge, some people would loathe this new industry to be "short-selling China as a whole", as the selective group hunting system for overseas-listed Chinese companies and its blatant profit-making taste vividly unfolding itself to be an orchestrated conspiracy targeted against companies that are "made-in-China". However, jumping into irrational and mixed-up conclusions at the beginning stage of commercial disputes, rather than playing by the rules and directing an equivocal right or wrong from a proper analysis, would only further clutter up the way forward for these Chinese companies. If Chinese companies take this challenge as a great opportunity of self-reflection, it will be hard to estimate whether it would be a loathing or blessing.
The best solution to the problem is to defend one's own interests within the framework of the game rules. Within these developed markets as aforesaid, information is the only way for investors to realistically assign any value to a company. Timely and accurate disclosure would reflect a public company's sincerity, helps clear away uncertainties, and accelerates the revaluation process.
The prevailing contempt of this hard game and the superstitious in off-market factors is the prelude of this hunting saga and will be the epilogue of most of these Chinese companies listed overseas. Fidelity to contractual obligations and fiduciary duties to investors will become the touchstone of a company's sincerity. Chinese companies have the necessity to strengthen their recognition and acceptance of the spirit of contracts and game rules. Ignorance of rules and contempt of disclosure has been depicted by stories of Gresham's Law, which essentially highlights the importance of independence and self-discipline among auditors and lawyers worldwide. An apparent violation can be easily avoided in its cradle by auditors with even a little independence. However, the fact that financial fraud is still prevailing among Chinese companies makes things more confusing. Financing is simply considered as a feast of the greenback, and listing an ultimate end, rather than a milestone in the development of an enterprise.
Clearly, we must admit that these Chinese companies, having emerged from an insufficient market economy originally upon their entry into the main-staged capital market, should be encountered by a certain level of frustrations, and the tuition to be paid for lessons learned here should become growingly painful nowadays. Knowingly, a cover-up is the biggest enemy to the free flow of information, but it is the cancer to the comprehensive development of a market economy. The challenges faced by Chinese companies are among the many facets of the market adjusting itself in the course.
Strict disclosure is not the end of the world for listed companies including these Chinese companies here discussed. An information collecting system akin to those of a developed capital market has the ability to survive through the irrational devaluations or nagging criticisms brought about by the current atmosphere collectively created, and in so, stock prices of these Chinese companies would hopefully be restored to a reasonable level in the end. All in all, giving to the foregoing concerns raised here, Chinese companies must rectify their shortcomings, and reshape their corporate image as qualified players among the competitive market of public companies.
Should Chinese companies make a humble call for mercy now? Should they otherwise put their past behind them, forget their previous shortsightedness and soldier on amidst all of this, will they deserve the same level of mercy from the market the next time around?
Zhao Xiao Hong,Partner at King & Wood PRC Lawyers probes into the accounts authenticity issue recently annoying US-listed Chinese cohorts
