Carson Block, the short seller who last year alleged fraud at Sino-Forest Corp. (TRE), said he’s considering investing in Chinese companies that trade on U.S. stock exchanges.
“We are very much looking for U.S.-listed Chinese companies with which we can go long,” Block said yesterday in an interview with Bloomberg Television’s Erik Schatzker. “I really hope they turn out to be companies that we feel have done things right.”
Sino-Forest is among Chinese companies trading in North America that Block and other short sellers accused of financial irregularities in 2011. Sino-Forest, a timber producer, dropped 74 percent in Toronto after Block’s Muddy Waters LLC research firm said in June that it had exaggerated its assets. The shares were suspended in August. Sino-Forest, under investigation by the Ontario Securities Commission and the Royal Canadian Mounted Police, denies the allegations.
“We’re looking at companies in areas that China does well, that take advantage of the cost disparities of production or delivering of services between developed markets and China,” Block said.
Institutional investors in North America should avoid buying U.S.-listed Chinese stocks unless they have the internal resources to “really check the company out,” Block said.
Chinese stocks trading in the U.S. have faced investor scrutiny in the past year after companies such as China MediaExpress Holdings Inc. (CCME) disclosed financial irregularities or auditor resignations. Muddy Waters fueled the speculation with reports on Rino International Corp. and Focus Media Holding Ltd.
“U.S.-traded China stocks were punished badly by all these scams but the fact they are traded in the U.S. requires more compliance and transparency than domestic shares,” Didier Duret, chief investment officer at ABN Amro Private Banking, said in an interview in Singapore. “You don’t stop the game because you have some scam. What will count is really the contribution of China to world growth. It’s about growth.”
China’s economy has expanded at an average pace of 10.3 percent annually over the last decade, data compiled by Bloomberg show. Growth slowed to 9.1 percent in the three months ended Sept. 30 from 9.5 percent in the previous quarter as shipments to Europe, China’s biggest export market, slumped.
The U.S. Securities and Exchange Commission began an investigation in 2010 into the use of reverse takeovers, in which a closely held firm acquires one that’s publicly traded, enabling it to sell shares without the regulatory and investor examination of an initial public offering.
‘Scratched the Surface’
China MediaExpress, which began trading in the U.S. following a 2009 reverse takeover, fell 99.9 percent last year amid allegations it manipulated financial statements. Its Chief Financial Officer Jacky Lam and auditor Deloitte Touche Tohmatsu resigned in March.
The Bloomberg Chinese Reverse Mergers Index (CHINARTO), which tracks 73 China-based companies that trade on U.S. exchanges following reverse takeovers, has rebounded 12 percent this year after plunging 62 percent in 2011.
“We’ve just scratched the surface of some of the problems among Chinese companies that listed in the U.S. via IPOs,” Block said.
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