Dot Com becoming Dot Con

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					PA G E 1 8                                                                CHINA DAILY                     ASIA WEEKLY                                                               J U LY 1 -7, 2 0 1 1


Dot-Com becoming Dot-Con?

   Just a couple of months ago the
debate was still open as to whether
there was a bubble in US-listed
Chinese Internet stocks. Today, it’s
hard to deny that the bubble is there
— unless it has already burst.
   In recent weeks, investor fever for
the typical Chinese growth story has
quickly turned into doubt and panic,
with many starting to shun the sec-
tor that used to provide such high
   The Nasdaq China Index, which
tracks major Chinese stocks trading
in the US high-tech stock market, has
dropped nearly 20 percent in fewer
than 40 days, from $243.45 on May
2 to $196.83 on June 10. Moreover,
the price of Chinese stocks, includ-
ing Sino-Forest Corp and Yongye
International Inc, has plunged more
than 50 percent.
   “You never know you are in a
bubble until it’s over,” said Duncan
Clark, president of the Beijing-based
research firm BDA China. “It’s part
of human psychology. And it takes
an event to shake people back into a
sense of reality.”
   And for many fevered investors,
the event that has shaken them
back to reality is a series of alleged
financial scandals involving Chinese
   Since March, more than two
dozen China-based companies have
disclosed information regarding
auditor resignations or accounting             PROVIDED TO CHINA DAILY
problems. Last month, the hedge
                                         US investors are told to be
fund manager, Jim Chanos, presi-
                                         cautious when investing
dent of Kynikos Associates and one       in Chinese companies
of the most prominent short sellers      following revelations of
of Chinese stocks, said that it was      accounting irregularities by
getting hard to find shares to short.     some of businesses.
   Over the following weeks, a num-
ber of US independent investment
companies, including Muddy Waters
Research, issued negative reports on     sively to protect investors from the     through reverse takeovers (RTOs),                     China, because they        and have something that’s easier
some Chinese companies, claiming         risks that may be posed by certain       which allow companies to trade                       don’t use the services of   to understand and to relate to,” said
they had been “aggressively commit-      foreign-based companies listed on        on US exchanges even though their       the companies that they are invest-      BDA’s Duncan. He said there is a ten-
ting fraud”.                             US exchanges”.                           operations are situated overseas.       ing in,” according to Charles Zhang,     dency for Chinese companies to try
   The market panic even forced             Schapiro noted that while the         The listing process is quicker than     chairman of Inc.                to position themselves as “the X of
Interactive Brokers Group to ban         majority of foreign-based issuers        a traditional initial public offering     He said many US investors              China”. “That may be useful in terms
clients from borrowing on margin         are engaged in legitimate business       and involves less scrutiny of the       believe that most Chinese Internet       of raising capital. But if you live by
to buy approximately 160 different       operations, others may be taking         credibility of a company’s financial     companies are simply copies of           cloning, maybe you die by cloning,”
Chinese companies. “While the vast       advantage of the remoteness of their     performance.                            established US companies, and so         he added.
majority of these Chinese compa-         operations to engage in fraud.             A survey by the US Public Com-        they often take it for granted that
nies may be legitimate businesses,                                                pany Accounting Oversight Board,        the companies will provide good          China story
a growing number of them are             Reverse takeovers                        which monitors auditors, identified      returns because of China’s contin-          In fact, US-listed Chinese compa-
proving to have significant account-        Separated by vast geographic           159 Chinese companies that listed       ued economic prosperity and the          nies, particularly those with high
ing deficiencies or are vessels of       distances, the language barrier and      in the US through RTOs from the         nation’s ever-expanding number of        growth potential, have already
outright fraud,” said Luis Aguilar, a    differences in legal systems, many       start of 2007 through to March          Internet users.                          proved attractive investments. A
commissioner at the US Securities        US investors find it difficult to fully   2010. That’s almost three times the       According to figures from the          good example is Baidu Inc, which
and Exchange Commission (SEC),           evaluate the true worth of companies     number of Chinese companies that        Nasdaq exchange, during the past         is a consistent holding for many
in April.                                operating in China. That provides        launched normal IPOs in the US over     12 months Chinese Internet stocks        American hedge and mutual fund
   In the same month, SEC Chair-         some dishonest Chinese companies         the same period. A Bloomberg index      put up the strongest showing on the      managers, and it has also performed
man Mary Schapiro said in a letter       with the opportunity to take advan-      also shows that Chinese RTOs more       first day of their listing with three     exceptionally well — up nine times
sent to the House Committee on           tage of US regulatory flaws to cash in    than tripled between March 2009         Chinese shares among the top five         over the past two years, compared
Oversight and Government Reform          on the capital market.                   and January 2010.                       highfliers.                               with Apple Inc’s three.
that “the SEC has moved aggres-            A major way to accomplish that is        “US investors don’t understand          “People want to simplify things           “In the US, the Chinese growth

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