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Chinese Stocks: More Trouble Than They're Worth?


(Chinese stock, accounting blow-up story updated for latest rallying Chinese stocks)

NEW YORK ( TheStreet) -- Are accounting blow-ups a fundamental risk of investing in Chinese stocks, or just another unfair reputational knock against the emerging world giant's economic juggernaut?

The latest accounting blow-up involving a Chinese stock occurred on Monday. It concerns not just one, but two affiliated Chinese companies, Duoyuan Printing (DYP) and Duoyuan Global Water (DGW).

Duoyuan Printing announced a number of changes on Monday that led to the selloff. The chairman announced that the CEO and CFO of the company were being replaced, and the Deloitte Touche Tohmatsu had been fired as auditor after bringing issues to the attention of Duoyuan management which remain unresolved.

Duoyuan Printing was down 54% on Monday, while Duoyuan Global declined by 41%. While Duoyuan Global Water's share bleeding had stopped by Wednesday morning, selling of Duoyuan Printing shares didn't cease until Thursday's action.

Earlier this year, Chineses poultry company Yuhe International (YUII) took a market beating after its auditor, Grant Thornton, resigned. Yuhe says it was misunderstanding between the Chinese company and the auditors over provisions of Sarbanes-Oxley that the Chinese management did not understand.

It was guilt by association in the case of Duoyuan Global Water, which shares the same chairman as the printing company.

In lowering its rating on Douyuan Global Water, Piper Jaffray analysts wrote on Monday, "Loss of management credibility in Chinese stocks leads to severe valuation compression. Concerns around internal controls and corporate governance at Duoyuan Printing will add fuel to already high investor concerns around China stocks, and we believe it will impact DGW. China will not go away as an investment theme, and U.S. investors will continue to seek exposure to China's growth, but caution is obviously required when investing in these stocks."

Is it simply, as the management of Yuhe International suggested, that the accounting blow-ups are cases of something being "lost in accounting translation" between Chinese companies and Western auditors?

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