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Beware the Chinese Rumor Mill

BEIJING ( TheStreet) -- Companies such as Cleantech Solutions (CLNT - Get Report) and ChinaBak Battery (CBAK - Get Report) have been the subject of explosive rumors that have driven their share prices dramatically higher in the space of one to two days.

These are just two examples of companies that have crashed to the pennies but then conducted large reverse splits to avoid a delisting by the Nasdaq. As the effect of the false rumors fades, Cleantech is likely to drop back to below $4 where it began. Likewise, ChinaBak will likely fall back to around 80 cents, where it was before the false rumor.

A few years ago there were hundreds of Chinese reverse merger stocks that traded in the US. Initially cheap valuations and seemingly stellar financials often led these stocks to deliver quadruple-digit returns. Unfortunately, it turned out that fraud and mismanagement were rife within these companies and the overwhelming majority ended up crashing. Many were delisted outright due to fraud.

Lately, a number of the straggling survivors that have avoided delisting have shown triple-digit spikes on the back of very specific rumors. This has led some to believe that there may be a resurrection within the space. But all is not what it seems.

Of the remaining companies still trading we can see that there is a common factor driving these stocks, and it is one that investors should avoid getting involved in. The common factor is that these are companies which have conducted a reverse split to avoid delisting and only then are the subject of explosive rumors.

The reverse splits mean that there are very few shares outstanding, creating limited supply. Such stocks are ripe for manipulation by false rumors.

A few weeks ago, CLNT tripled in the space of a few days, from around $3.50 to as high as $10.90. The cause of the spike was a rumor that the company would soon be selling to oil behemoths Sinopec (SHI) and CNPC. But the rumor was incorrect. The truth was that Cleantech had simply received a simple certification for its products, such that they could be deemed compliant with the oil giants' standards. This is far different than actually selling a product to them.

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