China’s entry into the World Trade Organization (WTO) in 2001 was seen by investors who were used to fair play and the relative ease of investing money in the Western Hemisphere as an opportunity that could make them thousands or even millions of dollars in the long term.
Many investors faced pitfalls, as they, in their exuberance to find a new venue for their investment money, had not studied the market and were faced with pitfalls, impediments, and complications not experienced in any other markets worldwide.
“Lack of knowledge of the Chinese laws and administrative regulations, and the cultural difference between China and Western countries as well as the language barriers will increase the challenge faced by foreign companies and investors,” according to an entry on the PRLog website, a press release distribution service.
One major issue, which addresses reliability and transparency, is that the Chinese regime, claiming national security issues, has forbidden the U.S. government-owned nonprofit Public Company Accounting Oversight Board (PCAOB) from reviewing audits of Chinese companies traded in U.S. markets. These companies still could be listed on U.S. stock exchanges, appearing as if they made the grade, but could be found to have misrepresented their financial condition and then suspended from trading on U.S. stock exchanges.
“Because of the position taken by certain non-U.S. authorities, the PCAOB currently is prevented from inspecting the U.S.-related audit work and practices of PCAOB-registered firms in certain European countries, China, and—to the extent their audit clients have operations in China—Hong Kong,” said the PCAOB on its website.
Chinese Firms Luring Foreign Investors
Chinese firms, in the hope of luring foreign investors into their fold, are very adept at using rules and regulations in a way they were not intended. One of the tricks used by many Chinese companies is the reverse merger. The Chinese firm sets up a legitimate U.S. shell company that has no real assets and then goes public, an arrangement that takes only 60 to 90 days to complete and is considered to be a backdoor type of arrangement.
When it comes to reverse mergers “fraud became so widespread, regulators and commentators coined the term Chinese Reverse Merger (‘CRM’) in order to describe a sector where investors assume the risk of accounting irregularities. ... A weak rule of law in China has resulted in poor implementation and enforcement of its accounting regime. U.S. regulators are hindered in policing accountants since the auditing occurs in China, where they have no jurisdiction,” according to a 2011 paper by Benjamin A. Templin in the Thomas Jefferson Law Review.
In 2011, the Securities and Exchange Commission suspended trading with six companies, including Heli Electronics Corp., China Display Technologies Inc., and China Wind Energy Inc., all set up under the reverse merger type of arrangement. Other companies, including China MediaExpress Holdings Inc. and China Century Dragon Media, have had their auditors resign when the company would not allow the auditor access to bank records. In two other cases, the auditor, citing accounting fraud, resigned from China Intelligent Lighting and Electronics Inc. and NIVS IntelliMedia Technology Group Inc.
Western firms, such as Wellington Management and the hedge fund Paulson & Co. Inc., Maurice “Hank” Greenberg, former CEO at American International Group Inc. (AIG), and other investment experts were taken to the cleaners when it came to investments in China.
Wellington Management had invested in a great number of stocks, all of which were halted or delisted by mid-2011. David Rubenstein, co-owner of the Carlyle Group, invested in China Agritech, which also lost its standing on NASDAQ.
“All of those investments have ended in disaster. Auditors have resigned, alleging fraud. Regulators have launched investigations, suspecting fraud. Exchanges have banished equities, fearful that fraud is ongoing,” according to an article on the Investors website.
Chinese Regime Still Attracting Foreign Investments
“In January 2012, 1,402 new foreign-invested enterprises established in China, down by 37.49% year on year. The actualized FDI [Foreign Direct Investment] reached US$9.997 billion, down by 0.3% year on year,” according to the Ministry of Commerce People’s Republic of China website.
The majority of investments on Chinese soil, amounting to $8.586 billion (85.89 percent of total investments), were by investors from Asian countries, such as Hong Kong, Macao, Taiwan, Japan, the Philippines, Thailand, Malaysia, Singapore, Indonesia, and South Korea.
In February, FDI in China decreased by 0.9 percent when compared to the same time in 2011. FDI has been decreasing year-on-year since November 2011, with a 9.76 percent decrease in November 2011 and a 12.73 percent decrease in December 2011, according to an entry on xinhuanet, the Chinese regime mouthpiece website.
European and U.S. investors are slowing down in establishing corporations in China. For the period January 2011 to January 2012, European investments decreased by 32.28 percent and U.S. investments decreased by 38.57 percent, according to an announcement on the Ministry of Commerce People’s Republic of China website.
“The outlook for China in attracting foreign direct investment this year is fairly grim,” said Shen Danyang, spokesperson for the Ministry of Commerce, according to the ChinaDaily website.
Chinese Regime Investing Abroad
“Chinese direct investment in the United States dipped to $69 million in Q4 2011, dragging down the full year figure to $4.5 billion,” according to a report by the Rhodium Group, released on April 4.
Chinese investments in the United States for 2011 decreased by 0.7 billion, from $5.2 billion in 2010. On the other hand, Chinese investments in Europe increased to almost $10 billion in 2011, a significant increase from the $3 billion in 2010.
“A mix of very attractive industrial high-tech assets, firms with highly skilled workforces, opportunities arising from fiscal consolidation and corporate restructuring, and a favorable policy environment were major drivers for strong growth of Chinese investment in Europe,” the Rhodium Group report said.
Nine Chinese banks established 14 new branches in the United States by the end of 2011. The Chinese regime and Chinese provinces hold ownership of six of the banks, including the Agricultural Bank of China and Bank of China, while ownership of the other three, including CITIC Bank International, could not be ascertained. Many Chinese banks may be owned indirectly by the Chinese regime or a Chinese province.
“Chinese banks urgently need to go abroad to learn and strengthen their skills and competitiveness. China’s big state-owned banks are, as former PBOC advisor Li Daokui put it ‘dinosaurs’ who significantly lag behind foreign banks and domestic private players with regard to skills and human talent,” the Rhodium report suggests.
US-Chinese Business Relationship at Crossroads
The U.S.- China investment relationship is at a crossroads with the United States worrying about investment restrictions faced by U.S. investors in China. The United States and Europeans criticize discriminatory laws, regulations, and the demand to turn over propriety information to the Chinese when doing business in the Chinese market.
China’s violations of World Trade Organization agreements and trade distortion activities, including the continued support of state-owned enterprises, has been frequently discussed by the U.S.-China Economic and Security Review Commission and has become a sore spot in the relationship between the two nations.
According to the Rhodium report, President Barack Obama used strong language when speaking to the Chinese at the 2011 APEC meeting. “President Obama told China to behave like a ‘grown up’ economy and ‘operate by the same rules as everyone else.’ He warned ’the United States can’t be expected to stand by if there’s not the kind reciprocity in our (…) economic relationships that we need,'” the Rhodium report said.
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