NEW YORK (
) -- The short-sighted shorts and knee-jerk investors generally inclined to bash Chinese stocks as too-risky investments will ultimately lose out on the growth opportunity from a Chinese basket of stocks, according to a new poll of
The risk issue with Chinese stocks came to a head -- again -- last week, when shares of
Duoyuan Global Water
tanked after an affiliated company fired its accounting firm. Firing the accountant didn't make the accounting issues flame out. Duoyuan Global Water and
share the same chairman, and as news of a potential accounting blow-up at Duoyuan Printing flared, the markets judged Duoyuan Global Water guilty by "chairman" association.
The latest Chinese stocks tanking is part of a larger debate over whether Chinese stocks are inherently more risky than Western stocks due to lack of credibility of corporate management and lack of Sarbanes-Oxley era internal controls.
There's great growth to be had from emerging China's emerging universe of stock investments -- this year, Chinese IPOs represent about one-third of the global total -- but the growth opportunity in Chinese stocks is viewed by many as one edge of the doubled-edged sword inherent in these investments. Investors are always on the edge with Chinese stocks because it's impossible to know when the Western accounting firm is going to be fired or quit when it refuses to sign off on financial statements.
Nevertheless, given U.S. investors lived through the era of Enron, Worldcom and Tyco and did not en masse flee belief in the ability of U.S. corporations to present credible books, do Chinese stocks deserve the reputation of being any more prone to accounting blow-ups than U.S. stocks?
clearly favored the argument that Chinese stocks don't deserve the bad reputation. One commenter to
expressed the understandable opinion that having watched Chinese stocks in his portfolio go down 30% overnight for no apparent reason, he gave up on Chinese stocks simply so he didn't have to keep his medicine cabinet stocked with antacid. He noted investments in
China Sky One Medical
-- down 73% year-to-date -- and even a more established Chinese stock name,
-- down 20% year-to-date -- as examples of the risky nature of Chinese stocks that he could no longer stomach.
One Chinese stock that surged last week was a perfect example of the raging debate over Chinese corporate management credibility:
. China MediaExpress management announced a share repurchase program that buoyed shares. Yet the shorts believe that the share repurchase is dubious, and in fact, the company doesn't have the cash for the $30 million stock buyback. One investor long on the stock told
that he thinks the shorts have it all wrong, but that doesn't mean the shorts don't have the power to drag down a Chinese stock on perceived accounting risk. China MediaExpress shares ended the week down close to 14% after shares had popped on Thursday when the share repurchase was announced.
Yet another investor noted that in 2009, 630 U.S. companies reported 674 accounting problems requiring earnings restatement, so anyone making the case that there is inherent accounting risk in Chinese stocks is crying foul without supporting evidence.
Some investors make the case that the investment rationale for buying Chinese stocks is simple, and is in fact bolstered by the value compression that is common as a result of perceived risk relative to "trustworthy" Western companies. The Chinese stocks have low price to earnings ratios because of the market prejudice and high growth potential, and these factors make
investing in Chinese stocks a risk investors cant afford to take.
By the poll numbers, this argument found the most support. Roughly 61% of survey respondents think that the perceived lack of credibility in Chinese corporate management is nothing more than a market prejudice; a stock is a stock is a stock, regardless of nationality of management, was the majority opinion.
Approximately 39% of survey takers don't trust Chinese stocks.
Not a majority, but a significant representation of the uphill battle for Chinese stocks, nonetheless. Yet just how much of this doubting 39% represents investors who don't have the Chinese stock risk gene, versus those investors who are actively trying to drive down the value of Chinese stocks, is an argument for another day.
"It's bashers and shorters and that's just made an opportunity now to acquire a nice basket of stocks," commented one reader to
-- Written by Eric Rosenbaum from New York.
>>Chinese Stocks: More Trouble Than They're Worth?