Investors in Chinese companies have depended upon outside auditors, institutional investors, and global investment banks as substantiation for the notion that their financial reporting is trustworthy. Recently, that trust has been seriously shaken as dozens of Chinese companies have withdrawn financial statements, faced auditor resignations, failed to timely produce current financial statements, and/or announced special financial investigations. In response, investors recently dumped practically all Chinese stocks, causing the entire sector to significantly underperform the rest of the stock market.
There are over 200 Chinese companies that trade directly on U.S. exchanges. The majority of these are small companies that obtained their U.S. status through reverse mergers with dormant U.S. shell companies. But the problems are not limited to these smaller companies.
The problem is discussed in much greater detail in this article.
The economic opportunities in China are almost too great to ignore; however, we did say “almost”. Given the recent hammering of Chinese stocks, this may not be the best time to exit Chinese investments that you already own. However, until the Chinese government wants to seriously address this huge credibility issue, Chinese stocks are only suitable for the most aggressive of investors.