September was a disastrous month for Chinese firms listed in the US amid acute regulatory uncertainty in both the US and China.
The iChinaStock 30, an index of 30 representative larger-cap Chinese stocks on NYSE and NASDAQ, is at its lowest-ever mark since its inception one year ago. It started September 1st at just over $1000 and has since fallen 33% to $666.
Investors are spooked by a sea of new regulatory proposals in both the US and China. No new frauds surfaced in September, but regulators are still responding to a series of frauds and accounting irregularities among Chinese stocks in March – May 2011, especially among reverse mergers. Alibaba Group CEO Jack Ma’s transfer of the Alipay online payment asset out of a VIE structure and into his personally-controlled company also prompted new regulatory attention.
Regulators have proposed reforms to the corporate structure, listing procedure, and accounting requirements for Chinese firms. The passage and impact of these reforms is uncertain, which places investors in an uncomfortable position.
Here’s a rundown of proposed regulatory reforms in 2011:
- April 18 – NASDAQ follows NYSE to propose a “seasoning requirement” to the SEC, which would require reverse merger firms six months to a year of trading over-the-counter before being allowed to uplist.
- July 11-12 – US and Chinese regulators fail to agree to cross-border auditing standards. The disagreement: the US side considers joint inspections as its standard modus operandi overseas, while the Chinese side considers it an issue of national sovereignty. The two sides will meet again in October.
- September 28 – CSRC report leaked to media [see iChinaStock analysis]. The report describes the VIE structure as a major threat to China’s national security, but exempts firms that are already-listed from new regulations. Proposes four key reforms, including Chinese regulatory approval of new Chinese firms that aim to list overseas.
- September 29 – US Justice Department probing Chinese accounting. “There are parts of the Justice Department that are actively engaged in this area,” Robert Khuzami, director of enforcement at the SEC, said in an interview with Reuters. This suggests that in addition to civil proceedings, individuals at offending firms may also face criminal charges.
The sell-off has hit both small-cap and large-cap ‘flagship firms’ alike, although the vast majority have not been accused of any wrongdoing.
The iChinaStock 30 was at over $1250 in may of this year, but has since fallen almost 50% to $666. The only certainty among Chinese stocks this year has been uncertainty.
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