It's Time to Open Up, China
China's embrace of capitalism often appears half-hearted. One thing is becoming clear, though: Its publicly traded companies should put a higher value on transparency and investor communications.
Two Chinese companies traded in Hong Kong were targets of short-seller reports this week: China Hongqiao Group Ltd., the world's largest aluminum producer, and CT Environmental Group Ltd., a small wastewater treatment firm. Their diverging paths following the attacks are a testament to the importance of a rapid response to investor concerns.
After a blip, Hongqiao's stock recovered losses prompted by an anonymous report that contained allegations about the company's business and financial operations. CT Environmental, meanwhile, plunged 20 percent minutes after Glaucus Research questioned its accounting, pushing the company to suspend trading of its shares.
Hongqiao has been here before. When the company first tried to access bond markets in 2012, it was met with skepticism from creditors who doubted the 20 percent net margins reported by the commodity producer, which far exceeded those of peers.
In response, Hongqiao hired an investor relations professional who could speak good English to explain its business model to global money managers. The company, based in the eastern province of Shandong, also made meeting with investors a regular part of management's schedule. Not only did the firm go on to sell two bonds but its stock has gained more than 50 percent in the past three years.
The reservoir of trust and goodwill built up by such exercises looks to have served Hongqiao well. After slumping as much as 4.3 percent on Wednesday, the shares finished 2.5 percent higher on the day. (Hongqiao, in a stock exchange announcement, called the allegations one-sided and misleading speculation, and said it's preparing a detailed clarification.)
Such is the benefit of experience. CT Environmental's investor relations manager, Sasha Zeng, told Bloomberg News on Thursday that the company would file a formal response to the Glaucus report with the Hong Kong exchange. The response hadn't been published as of mid-afternoon, more than 24 hours after the stock was suspended. What CT Environmental did do was contact its biggest shareholders to explain points in the Glaucus report that it said were wrong, according to Zeng.
At least CT Environmental acted. Too few companies in China bother to engage with shareholders. Once they have sold stock, Chinese companies generally restrict their communications with investors to issuing semi-annual reports and other required filings.
Of the nine companies that scored lowest in organizational transparency in this year's Transparency International corporate report, eight were Chinese. Most of the firms included are multinationals, which are subject to stricter disclosure requirements.
That's why China has been a playground for short-sellers. While in some cases they have been proved right and frauds have been exposed, attacks aren't always justified. The best defense is a full and rapid response.
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