Let’s be honest, if you have played the smallcaps for the past decade like I have you have likely played a Chinese stock or two that have turned into nothing. On the smallcaps you usually hear nothing after a certain amount of time. Perhaps something didn’t go right? Who knows.
Bigger stocks from China on the big boards have had a terrible run for the last few years as there just does not seem to be any way that any of them can be trusted.
About seven years ago I had this CPA doing the books for a couple of businesses I was involved in. She really worked outside of our business, but she went over my trading records. One thing was for sure, she knew all about China and Chinese businesses. She had moved from China just a year or two before she worked for us. Every time she would see that I bought a Chinese stock she would scold me. She told me, “Don’t ever buy a Chinese stock on a US exchange. It’s a big joke to them. They cannot be trusted.”
Oddly, that was really the first I heard of Americans not being able to trust Chinese companies. She was from an elite family and knew some of the leadership in her area of the country. She explained to me in great detail how no contract or other agreement with an American company matters much to the Chinese business people. She explained to me that if the Chinese government regulators ever asked a Chinese business about any of its business arrangements with US companies, the government (she said) EXPECTED that the Chinese are getting the best of the deal. She said that screwing the Americans was considered okay, as long as they did good by their government. She was very blunt in her assessment of the lack of integrity on the Chinese side, and she said it was ingrained in the system. I will not even use a part of her name, but I will tell you this, I never forgot her words as I saw other Chinese companies through the years. Over these years since I have seen names who are “big” in the smallcaps get done in by making bad deals with Chinese companies – or being a part of the scheme, maybe.
Going back a couple of years before I got that warning from that CPA, I will share this. There were a lot of hot companies on the smallcaps from China. I remember meeting one of the CEO’s of a smallcap company we had shares in as he came through the Dallas / Fort Worth area. He was a nice guy. He had great ideas. The company did not work out. I attributed that to the fact that he suffered a sudden disease and died within a year of so of meeting with him. That was 2004.
After 2004 I began to see the apparent frauds coming front and center to investors. It was after dealing with that Chinese company that I first hired that CPA. It was shares of that company going from something to nothing that led her to give me the first scolding.
So here it is, 2013. Have things finally changed for the better?
Yes, I think they are changing for the better for the very large companies. With companies like Apple, Samsung and others bringing products made in China to the American population, there is little doubt that China values our market far more than they did a decade ago. Apple does contracts with Chinese companies that they obviously have total faith in, so if it is good enough for AAPL it should good enough for me. Right?
I have spoken to a couple of key Chinese executives with small and medium cap Chinese companies over the past two years. They hated being painted as “frauds” unfairly. They explained to me there is a real legal downside in their country to being revealed as a fraud. They say the downside is jail in China if you humiliate the country by being a fraud.
Three stories just how show this is not yet solved. They show I am wrong in being even somewhat optimistic.
- I saw this on Reuters on Sunday: “Analysis: Accounting risk clouds big U.S. business bets in China” (LINK)
- I saw this last week: “The simplicity of Chinese accounting scandals” (LINK)
- And – MOST IMPORTANTLY – this last week as well: “Paul Gillis: Three Accounting Frauds Most Chinese Companies Use To Cheat Foreign Investors” (LINK)
I used to keep a section on my site of interesting Chinese companies. I have not had that for over two years. Hopefully things change. I am looking at a couple of Chinese stocks that friends really like. Can we trust such companies?