More than 210 Chinese companies are actively traded on the New York Stock Exchange, Nasdaq, and other over-the-counter non-Chinese stock markets, but most of them are not subject to the same transparency as other listed public companies.
For Western companies to be listed on stock exchanges, they must be privately owned by shareholders—meaning that they must be independent from government control.
Baidu, China’s largest search engine, has been actively traded on Nasdaq since 2005. Other large state-owned enterprises (SOE) such as China Southern Airlines (NYSE), China National Offshore Oil Company, and China Telecom, along with more than 75 other Chinese firms, are traded on U.S. stock exchanges masquerading as private sector companies.
“An analysis of the ownership structures of these companies raises some issues,” as many companies are based in the Cayman Islands or anywhere else but China, while the assets are within China, testified Peter M. Friedman, attorney at Akin Gump Strauss Hauer & Feld LLP, during his testimony at the U.S.China Economic and Security Review Commission.
Friedman suggests that these companies may have either federal or state government ownership to some degree, but that it is difficult to know given the lack of transparency. “There is no easily searchable database or other resource to verify the onshore ownership structure of these companies.”
Standard disclosure language, as required under the Securities and Exchange Act of 1933 and 1934, is more than adequate for an educated investment decision regarding Western companies, but not remotely enough for even a sophisticated investor to make an educated investment decision regarding state-owned Chinese firms.
“However, adequate disclosure and access to information required under U.S. securities laws are not concepts immediately associated with Chinese companies. ... A reasonable investor in Chinese companies may be different than a reasonable investor in American retail companies.” Friedman said.
Friedman stressed that investment prospectuses from such firms are not adequate to describe the companies’ operating environments.
Risk Factors in Chinese Market
“Investing in a Chinese company is not for the faint of heart, and like investing in any emerging market, implies a certain understanding or knowledge about China that would lead an investor to invest in Chinese companies,” Friedman said in his testimony.
Greater risk factors in the Chinese market, including unenforceable laws, state secrecy laws, violations of intellectual property rights, and other factors, require a more detailed, accurate, and customized description for those considering investment.
What is normal in doing business in the United States may not be considered normal in China and could result in prosecution.
“The State Secrets Law affects American business in China by potentially criminalizing the gathering of ordinary business information,” testified Gordon G. Chang, a Forbes columnist.
Case in point is the highly controversial trial of the executives of the Rio Tinto Group, the British-Australian global mining company. After a secret state trial, three of Rio Tinto’s Chinese executives were given long prison terms for allegedly stealing trade secrets.
The Rio Tinto case sets a dangerous precedent for every American firm doing business in China. It brings home that any foreign company and its employees can run afoul of the Chinese Communist Party (CCP) at the whim of its often confusing and ever-changing laws.
“Prosecutions in the People’s Republic for state secret violations are noted for procedural and substantive unfairness. ... The Chinese party-state, in short, does what it wants in state-secret prosecutions,” Chang said.
Chang added that investors should not for one minute believe that the Chinese state secrecy law is legitimate. This law is illegal, just as all other Chinese laws. The dilemma is that a new amendment to the law, which takes effect Oct. 1, allows the CCP to censor and conceal information so it can hold on to power.
Chang believes that Chinese authorities are displaying paranoia and fear of losing economic power and control. They are afraid that global companies seize too much market share, have control over technological advances, and foreign investments are closing down opportunities for the Chinese. Never mind that Chinese firms try to capture as much foreign market share as possible.
“In this environment, Beijing is not hesitant to undermine multinationals, and the State Secrets Law is apparently one of its main tools to help domestic enterprises at home,” Chang said.
Learning to Play the Game
“Risk factors are one way that the SEC uses disclosure to make an offering unattractive to investors without explicitly telling investors to avoid a risky offering,” Friedman said.
The SEC could state that the filing lacks full disclosure, that it violates transparency requirements, does not discuss existing unfavorable business environments, remains silent on competitive factors, and does not discuss insider trading issues.
Friedman strongly feels that country risk, especially prominent in emerging economies including China, is a major business risk, and of which knowledge must be considered a cornerstone for any investments, including in companies listed on Western stock exchanges.
With respect to China, boilerplate language should be discarded as certain laws and regulations may change arbitrarily or are utterly unenforceable.
“The ‘one-size-fits-all’ approach for Chinese companies seeking to list on U.S. exchanges should be abandoned in favor of a disclosure regime that critically assesses each company seeking to list in the U.S. and inquires about which specific country risks should be disclosed to ensure U.S. investors are receiving all material information about that issuer and can make an informed decision,” Friedman said.
For Western companies to be listed on stock exchanges, they must be privately owned by shareholders—meaning that they must be independent from government control.
Baidu, China’s largest search engine, has been actively traded on Nasdaq since 2005. Other large state-owned enterprises (SOE) such as China Southern Airlines (NYSE), China National Offshore Oil Company, and China Telecom, along with more than 75 other Chinese firms, are traded on U.S. stock exchanges masquerading as private sector companies.
“An analysis of the ownership structures of these companies raises some issues,” as many companies are based in the Cayman Islands or anywhere else but China, while the assets are within China, testified Peter M. Friedman, attorney at Akin Gump Strauss Hauer & Feld LLP, during his testimony at the U.S.China Economic and Security Review Commission.
Friedman suggests that these companies may have either federal or state government ownership to some degree, but that it is difficult to know given the lack of transparency. “There is no easily searchable database or other resource to verify the onshore ownership structure of these companies.”
Standard disclosure language, as required under the Securities and Exchange Act of 1933 and 1934, is more than adequate for an educated investment decision regarding Western companies, but not remotely enough for even a sophisticated investor to make an educated investment decision regarding state-owned Chinese firms.
“However, adequate disclosure and access to information required under U.S. securities laws are not concepts immediately associated with Chinese companies. ... A reasonable investor in Chinese companies may be different than a reasonable investor in American retail companies.” Friedman said.
Friedman stressed that investment prospectuses from such firms are not adequate to describe the companies’ operating environments.
Risk Factors in Chinese Market
“Investing in a Chinese company is not for the faint of heart, and like investing in any emerging market, implies a certain understanding or knowledge about China that would lead an investor to invest in Chinese companies,” Friedman said in his testimony.
Greater risk factors in the Chinese market, including unenforceable laws, state secrecy laws, violations of intellectual property rights, and other factors, require a more detailed, accurate, and customized description for those considering investment.
What is normal in doing business in the United States may not be considered normal in China and could result in prosecution.
“The State Secrets Law affects American business in China by potentially criminalizing the gathering of ordinary business information,” testified Gordon G. Chang, a Forbes columnist.
Case in point is the highly controversial trial of the executives of the Rio Tinto Group, the British-Australian global mining company. After a secret state trial, three of Rio Tinto’s Chinese executives were given long prison terms for allegedly stealing trade secrets.
The Rio Tinto case sets a dangerous precedent for every American firm doing business in China. It brings home that any foreign company and its employees can run afoul of the Chinese Communist Party (CCP) at the whim of its often confusing and ever-changing laws.
“Prosecutions in the People’s Republic for state secret violations are noted for procedural and substantive unfairness. ... The Chinese party-state, in short, does what it wants in state-secret prosecutions,” Chang said.
Chang added that investors should not for one minute believe that the Chinese state secrecy law is legitimate. This law is illegal, just as all other Chinese laws. The dilemma is that a new amendment to the law, which takes effect Oct. 1, allows the CCP to censor and conceal information so it can hold on to power.
Chang believes that Chinese authorities are displaying paranoia and fear of losing economic power and control. They are afraid that global companies seize too much market share, have control over technological advances, and foreign investments are closing down opportunities for the Chinese. Never mind that Chinese firms try to capture as much foreign market share as possible.
“In this environment, Beijing is not hesitant to undermine multinationals, and the State Secrets Law is apparently one of its main tools to help domestic enterprises at home,” Chang said.
Learning to Play the Game
“Risk factors are one way that the SEC uses disclosure to make an offering unattractive to investors without explicitly telling investors to avoid a risky offering,” Friedman said.
The SEC could state that the filing lacks full disclosure, that it violates transparency requirements, does not discuss existing unfavorable business environments, remains silent on competitive factors, and does not discuss insider trading issues.
Friedman strongly feels that country risk, especially prominent in emerging economies including China, is a major business risk, and of which knowledge must be considered a cornerstone for any investments, including in companies listed on Western stock exchanges.
With respect to China, boilerplate language should be discarded as certain laws and regulations may change arbitrarily or are utterly unenforceable.
“The ‘one-size-fits-all’ approach for Chinese companies seeking to list on U.S. exchanges should be abandoned in favor of a disclosure regime that critically assesses each company seeking to list in the U.S. and inquires about which specific country risks should be disclosed to ensure U.S. investors are receiving all material information about that issuer and can make an informed decision,” Friedman said.
Friends Read Free