In 2008, the National General Administration of Quality Supervision, Inspection and Quarantine raised the flags when a pediatric urologist noticed a rise in the number of children afflicted with kidney stones, a rare condition. Mounting fears and inquiries causally traced the source to then-popular Chinese infant milk powder, Sanlu, which was found laced with melamine.
Sanlu Group, a Chinese dairy produce company, based in Shijiazhuang in Hebei province, was found guilty and was ordered bankrupt after an estimated 300,000 infants fell ill – and at least 6 died from the tainted milk scandal.
This episode ignited what was perhaps the first wave of widespread international concern and scepticism over quality assurances in the “Made in China” label.
Headlines in the recent weeks have once again refocused the spotlight on bad practices in Chinese brands and companies.
Just last week, Chinese officials uncovered five fake Apple stores in the southwestern city of Kunming, and suspended two of the faux outfits as investigations are underway, a local government website reported on Monday.
The investigation follows a blog post by an American living in Kunming in Yunnan province who spotted the bogus Apple stores decorated, designed and modelled to the tee as the genuine Apple stores.
The proliferation of these sort of commercial fraud and lack of quality audits highlights the slow progress the Chinese government is making in countering a system of rampant piracy and shoddy management practices. Much to the dismay and frustration of its trading partners and investors.
Equity markets are not spared from allegations of false accounting practices at Chinese companies either. Sino-Forest Corporation is the latest company from China to characterise what is fast becoming a truism: for Chinese companies listed abroad through reverse takeovers, short selling can prove to be massively profitable.
Instead of attracting investors the conventional way, which is through initial public offerings, many Chinese companies listed on North American stock exchanges have opted for the backdoor route by buying over near-defunct shell companies.
Known as reverse takeovers, or RTO, this strategy provides Chinese companies a comparatively easier access to financial markets, without the strict scrutiny and filing requirements that initial public offerings are subjected to.
Read the full report by Michele Lin, on EconomyWatch: China’s Shady Accounting Practices and Bad Apples