This Day On The Street
Continue to site
ADVERTISEMENT
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

China's Big Risk: Corporate Fraud

NEW YORK ( TheStreet) -- Ask a random group of people who follow the markets what the greatest risk facing China is these and you'll likely hear:
  • Rampant inflation
  • Resource scarcity like water, food, fuel, and other commodities
  • Property bubble
  • Growing disparity between the rich and the poor
  • An artificially high yuan relative to the dollar

But there's a new risk on the horizon facing China -- and it's one that's totally within its own power to control: the perception of rampant corporate fraud.

Notice I didn't say there is currently rampant fraud, but there is an undeniable unease and distrust growing in America over increasing cases of Chinese fraud.

It started last year in the relatively small but prolific world of "reverse take-over" IPOs. There have been a number of high-profile cases of Chinese companies -- including RINO International (RINO), China MediaExpress (CCME) and China Agritech (CAGC) -- with market capitalizations in excess of $500 million being accused of fraud by short-sellers, failing to supply an adequate response, and then seeing their shares delisted back to the pink sheets.

Although the details from these cases were shocking, the casual observer could believe that the problem had been ring-fenced to this particular sector of the market: smaller companies, dealing with smaller auditors, and lesser-known investment banks. The cases certainly call out for action from the NYSE and Nasdaq, as well as the SEC and PCAOB, but at least they were relatively small companies.

But the case of Longtop Financial (LFT) --- a financial software firm whose stock is currently halted on the NYSE -- is more troubling. It's a much larger company than the reverse mergers; its stock was worth over $2 billion last year. It went public in the traditional way, with Goldman Sachs (GS) no less as its underwriter. And it had Deloitte, a "Big Four" auditor, vetting the books. Yet, its CFO and Deloitte both resigned a couple of weeks ago and the stock will most certainly see a significant drop in value when it re-opens.

Yesterday, the Central Commission for Discipline Inspection of the Communist Party of China announced it was launching an anti-corruption investigation into China's largest telcos: China Telecom (CHA - Get Report), China Mobile (CHL) and China Unicom (CHU - Get Report).

Also, the equivalent of the Chinese auditor general has recently spoken out about the need to clean up at least 17 cases of a certain amount of fraud among the largest state-owned enterprises.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
RINO $0.01 0.00%
CHL $59.74 0.00%
CHA $52.88 0.00%
CHU $13.42 0.00%
AAPL $113.29 0.00%

Markets

Chart of I:DJI
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 +1.21 0.06%
NASDAQ 4,828.3250 +15.6170 0.32%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs