Chinese Listed Stocks in America – Time to Say Good Bye?

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Of the approximately 6100 stocks that MarketGrader.com covers, 330 of them are ADRs. Within this universe of ADRs, nearly 1/3 of them are Chinese companies listed in the United States.

Over the last few days, a number of pundits have debunked the view that China’s economy is in trouble noting that 8% growth in GDP is laudable not withstanding rising food prices, lowered interest rates, city governments overextended, regional labor strife, slacking  domestic demand etc.  China is in the news again – this time because all may not be as bad as it seems.

But no matter what one’s view of Chinese growth and what it portends for the global economy, one inescapable fact stands. Fraud in auditing and accounting misstatements has strained the credibility of Chinese companies listed in the U.S. In response, the SEC has told Chinese authorities that it wants to be able to inspect Chinese accounting firms. Given the likelihood that China will never agree, the SEC may force the delisting of all Chinese companies using accounting firms not subject to the Public Company Accounting Oversight Board. Just recently, in a more direct response to a political challenge by the U.S., the China Development Bank has begun providing help to small Chinese companies listed in the U.S. to buy their shares back and de-list. This action supports the view espoused by some in senor leadership to end Chinese companies using foreign stock markets to raise capital and bring them back and have them re-list in Hong Kong or Shanghai. And the China Development Bank has the horse power to do just that with an $879 Billion loan book. How that would resolve the credibility problem is unclear but at least U.S. investors would be rid of exposure to misleading financials.

Should this come to pass, however, a number of well managed Chinese companies will have fallen victim to politics and those U.S. investors looking for Chinese exposure forced to invest off – shore with much greater risk. Transparency must trump opacity no matter where a stock is listed and fundamental analysis will always be the driving force that leads to full financial disclosure.

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