Editor's note: Following the Financial Crisis, and in the midst of the “Occupy Wall Street” movement, you wouldn't expect many people to hold the US regulatory system in high regards, as it has clearly shown certain… deficiencies in keeping big business in check. Yet, for as mismanaged as many US companies are, many Chinese companies are worse. The following was translated and edited from a blog article on why Chinese companies haven't succeeded in the US market. The author does a fine job of first criticising US investors for thinking (erroneously) that Chinese companies are the magic cure-all for the Great Recession, but then shifts the blame to the Chinese companies who exploit the system and the Chinese regulatory system that sits back and lets it happen.

Simply put, it has not been a great year for Chinese companies in the US stock exchanges. The global markets have been a bleak mess due to the debt crises across Europe and the US, and stocks for Chinese companies in the US markets have not been spared in the least. From NYSE to NASDAQ, literally every Chinese stock has fallen to a varying degree in the last year. What's more, the magnitude of decline for Chinese stocks has far exceeded that of all the three major US stock indexes.

Why is the US picking on Chinese companies?

In May, stocks for 30 Chinese companies in various US indexes dropped by 13.62%. During the same time, the Dow, NASDAQ, and S&P only lost 1.88%, 1.33% and 1.35% respectively. By June, Chinese stocks took an even greater beating; UTStarcom, Suntech, AirMedia and 19 others fell more than 10% (some as much as 20%) in a single month. Worse yet, quite a few Chinese companies were suspended or even removed from the US market. Since March, NASDAQ and NYSE have already suspended 18 Chinese companies, and since December 2010, eight Chinese companies have been removed. Chinese companies, feeling frustrated, discriminated against and resentful of being undervalued by US investors, are considering, or have already pulled out the US.  

Companies not meeting US expectations of the "future China"

Chinese companies have always been convinced that being listed on a US stock exchange was a clear indicator of their company's economic prowess in the global economy. In contrast, Americans, anticipating the bright future of China's companies, were convinced that through “snatching up” Chinese stocks today, they would reap the benefits as the Chinese companies continued to grow. In a sense, Americans took the "China's rapid economic growth" concept, and applied it to any Chinese company listed in a US stock exchange, no questions asked. After Chinese companies entered the US stock exchanges, and the lofty expectations of the US investors were not matched, the companies instead found themselves under spotlight being interrogated, facing strict regulations and harsh punishments.

In addition to the US Security Exchange Committee (SEC) and the Stock Exchange, auditing agencies, law firms, hedge funds, media, individual investors and others are all closely watching these companies; as the slightest mistake is made by a listed company, everyone is quick to attack. Chinese companies have frequently been nailed for accounting fraud, corporate financial misconducts and corporate governance flaws among other problems. This has taken the Chinese companies by surprise. Such misconduct as "falsifying financial statements" in China's stock exchanges are very common, and most listed companies do it, so Chinese are not likely to hold them accountable; suffice it to say these matters are followed a bit more closely in the US.

Lessons to Learn

So why can't Chinese companies handle the US market? Because Chinese companies, accustomed to working in the domestic market, are playing by the same rules in the US market where doing such things is much less tolerated. In China's domestic market, ample amounts of "officials colluding with businessmen", insider trading and loopholes in the China Securities Regulatory Commission (CSRC), all allow/encourage the local companies to do as they please. Think about it—in this kind of environment, companies have been nurtured to be a group of swindlers who have no concept of trustworthiness. Perhaps it's that they don't understand the US legal system, or the "rules of the game"; consequently they are insanely reckless in the US market. US investors don't take too kindly to that kind of corporate behaviour.

It is more difficult for Chinese companies to misappropriate money in the US than China. Domestically, nearly 200 million shareholders have suffered losses recently and misappropriations are higher now than they have been in any previous year. Why in such a dire situation, is the Chinese regulatory system still only doing the bare minimum, consequently making it incredibly easy for companies to misappropriate? In China, after a company is listed, its “report” on its price-earnings ratio will often surpass the listed price by X-times, after which its stock price will immediately skyrocket, making everyone very rich. While misappropriating of this kind has always been quite common, in the past the amount was often much smaller. But now, misappropriation is no longer in the tens of millions of Yuan; it's in the billions of Yuan.

In the long run, Chinese companies being exposed by the US markets is most definitely not a bad thing. It can also be said that Chinese companies coming to (and failing out of) the US market have paid the necessary price for their misdeeds. What is crucial is that China's companies reflect on their actions and learn from these embarrassing incidents.
 

Source: huanqiu
 

Related links
The Chinese Stock Market: A Place for Private Individuals?
Chinese Business Practices – 3 of the Biggest Cultural Differences
Is America Crumbling as China Grows?

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Keywords: Chinese companies in US stock market Chinese companies US stock exchange China company stock falling Chinese regulator system problems Chinese company misappropriation