The entire Chinese stock market is feeling the weight of fraud fears, as growing concerns about accounting irregularities in US-listed stocks tars every stock with the same brush.
The overall lack of transparency in Chinese companies and the Chinese economy is now a major liability. China is “the new dot-com” of the investment world, says Martin Wheatley, Hong Kong’s former securities regulator.
The sell-off has turned into a rout following a belated warning from the US Securities and Exchange Commission urging investors to review company filings for foreign companies that have listed in America through reverse mergers. Today, there are more than 500 such Chinese companies in the United States, collectively worth billions of dollars.
Institutional investors with reputations on the line simply cannot afford to stay in China stocks, hoping that they won’t become the victims of fraud. Even Sina.com, a Chinese internet stock which was supposed to be one of the most credible Chinese companies has been hit, as shareholders like Wells Fargo, UBS, T Row Price, and dozens of hedge funds review their stakes.
Understandably, questions are now being asked about the real level of bad and doubtful loans in Chinese banking, and the undisclosed ownership of some of China’s largest companies.
As China’s property bubble threatens to burst, economists like Nouriel Roubini are predicting that China will soon face a massive non-performing loan problem in the banking system and a massive amount of overcapacity that is going to lead to a hard landing. Guaging these risks is made all the harder when investors don’t know the actual pace of credit growth, because of the scale of off-balance sheet lending.