Is there a weird kind of global-business cold war going on? The SEC is reportedly probing “hundreds” of Chinese firms that have achieved listed status on U.S. stock exchanges via a back-door trick.
According to the Wall Street Journal, the Securities and Exchange Commission has begun a crack-down on “hundreds” of Chinese firms that have sneaked their way into the various U.S. stock exchanges by a back-door process. The trick is called a reverse take-over, and it involves a dormant “shell company” which is listed, but which carries out little to no genuine business and often uses dubious accounting and business management methods. At some point, a successful Chinese firm undertakes a merger with a dormant firm, quietly and in the background, and though notionally the shell company is the lead firm that’s trading on the stock exchange, actually it’s the Chinese partner that’s the core of the business.
The SEC is investigating the matter on all levels, but is apparently concentrating on the “networks of U.S. accountants, lawyers and bankers” which, according to inside sources who’ve spoken to the WSJ, have been facilitating the arrival of these Chinese companies.
The lure is significant for these companies–listing on the Chinese exchanges is tricky, requires consent of the government, and the exchanges are “inefficient.” Listing in the U.S. is a way of gaining both cash and credibility in a simpler market that doesn’t come with massive Chinese government scrutiny. The SEC’s concerns, on the other hand, rest very much on scrutiny: The concern is that these reverse-engineered Chinese firms are making auditing hard due to language barriers, and may be hot-houses for fraud and self-promotion.
U.S.-Chinese business relations are very much in the news at the moment, and not in a good way. The WikiLeaks cablegate papers revealed that a Chinese politburo member was behind the multiple cyberattacks in 2009 that targeted Google and other big U.S. firms, causing worries about data loss and actual financial harm to some bodies. Google’s subsequent battle over censorship has been in and out of the headlines ever since. Successful telecoms firm Huawei was recently denied the right to purchase a U.S. firm, despite being the highest bidder–twice–because of concerns that the company may have connections to the Chinese government, and could gain access to sensitive U.S. technology.
Meanwhile, the “Facebook of China,” Ren Ren has been considering an IPO but state-level control and censorship concerns have worried potential U.S. investors, who could see their entire business upended if Ren Ren ever offended the Chinese government. Meanwhile Mark Zuckerberg was actually in China this week, speaking to the boss of Baidu–China’s biggest search engine–about the possibilities for business in China, where Facebook is routinely censored as it offers communications channels the government can’t control.
Reading all this, you may be forgiven for wondering if there’s an intellectual and fiscal cold war going on between the U.S. and Chinese governments, each with radically different ideologies about business, being played out on the battlefield of the stock exchanges. With trillions of dollars of business at stake, it’s perhaps not surprising–and at least it’s better than a cold war based on weapons.
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