In the wake of recent fraud allegations against two firms listed in Hong Kong, analysts expect to see more such claims from short sellers, but they say the task of exposing fraud among mainland companies is becoming increasingly difficult with China’s tough secrecy laws.
“It is not surprising we are seeing more cases of short sellers issuing reports on Chinese companies. There has been a trend of proven Chinese frauds since 2010 and we are likely to see more,” said Brian Fox, founding president of Capital Confirmation, a US provider of electronic auditing services.
Last week Anonymous Analytics, a group of anonymous analysts, issued a report alleging fraud at Tianhe Chemicals Group, a mainland chemicals firm, while Emerson Analytics, a group of equity analysts, issued a report alleging fraud by Shenguan Holdings Group, a mainland sausage casing maker. Both Hong Kong-listed firms issued brief denials of the allegations and threatened to sue their accusers for libel.
“Some people question the motives of the short sellers. However, because so many of the recent fraud reports issued by the major short sellers have proven accurate, it points to the larger fundamental issue; there are an abnormally large amount of Chinese companies listed on foreign stock exchanges looking to take advantage of investors,” said Fox.
However, it is becoming harder for short sellers to obtain corporate documents on the mainland, due to China’s increasingly tough secrecy laws which also cover corporate information, said governance activist David Webb.
Last month, Peter Humphrey, a British corporate investigator, and his American wife, Yu Yingzeng, were sentenced to jail by a Shanghai court for illegally obtaining private information. An article by Humphrey posted on his company’s website in May last year complained that access to corporate information on the mainland had become more difficult.
On August 22, the Securities and Futures Commission warned that sponsors of initial public offerings may be criminally liable for falsehoods published in prospectuses.
“There is an inherent conflict for underwriters and the Hong Kong stock exchange to find fault with the companies. They make money off IPOs,” said Dane Chamorro, Southeast Asia managing director of Control Risks, a risk consultancy based in Britain.
Webb recommended changes to Hong Kong’s system of sanctioning offerings, whereby the stock exchange approves the listing while the SFC exercises veto power. Instead, the SFC should be the only listing regulator, Webb urged.
Emerson Analytics has also issued fraud allegations against China Lumena New Materials Corp. The shares of both Shenguan and Lumena remain suspended.