This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

China Stock Fraud News Already Priced In

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage.

BEIJING ( TheStreet) -- It was widely announced Tuesday that the Securities and Exchange Commission was conducting a major crackdown on the practice of "reverse mergers" by Chinese companies due to widespread allegations of accounting misstatements and outright fraud. It was top headline news at TheStreet as well as the Wall Street Journal.

One might assume this type of news would have had a negative impact on the prices of U.S-listed Chinese stocks. However, I decided to run a quick screen to see what the real impact was and the result was a bit surprising. I looked at all U.S.-listed China companies that I track with a market cap of greater than $50 million (266 companies) and found that the overall return for the day was a positive 0.5%. Basically, they were flat on the day.

Why didn't the market react more to this news? Because the market already knew. This year has seen numerous accounting restatements and outright frauds among U.S.-listed Chinese companies and the prices of the entire space have traded down as a result. Therefore, this fraud news is already priced in. But this has been a process that has slowly been evolving over the course of 2010 and the SEC investigation comes as no surprise to many investors who have witnessed numerous individual stocks drop by 40% to 60% in a day due to accounting irregularities or accusations of fraud.

It was just a few years that there were only a handful of Chinese stocks traded in the U.S.. Now there are more than 500 (including the major exchanges, OTCBB and Pink Sheets). And the number is growing substantially every month. The vast majority of these new listings come from reverse mergers, which also are known as reverse takeovers (RTOs) as seen below.

In 2010, Chinese initial public offering, as opposed to RTOs, have garnered much attention for two reasons. First is the sheer number of them, with Chinese IPOs accounting for roughly a quarter of all IPOs completed this year. Second is the performance, with Chinese IPOs being among the year's best aftermarket performers. Examples include:

1 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,265.99 +109.14 0.64%
S&P 500 2,011.36 +9.79 0.49%
NASDAQ 4,593.4250 +31.2360 0.68%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs