Prices of US-listed Chinese stocks fell as their accounting is under investigation
The investigation follows a series of high-profile scandals this year
Internet stocks were hit hardest, with Baidu falling nearly 10%
Prices of US-listed Chinese stocks fell after the Securities and Exchange Commission’s enforcement chief said the Department of Justice is looking into accounting practices at Chinese companies, following a series of high-profile scandals this year.
Internet stocks were hit hardest. Baidu, the search engine company, fell 9.2 per cent to $110.29 and e-commerce site Sina was down 9.7 per cent to $73.23 on Thursday. The recently listed video streaming site Youku fell 18.3 per cent to $16.24.
In 2010, the SEC launched an investigation into so-called reverse mergers, which allow companies to bypass the scrutiny of an initial public offering by taking over a shell company already listed on a US exchange.
That investigation has focused in on accounting practices after at least 25 New York-listed Chinese firms disclosed discrepancies in their filings, or saw their auditors withdraw, in the first half of 2011.
On Thursday, Robert Khuzami, SEC enforcement director, told Reuters that “parts of the justice department are actively engaged in this area,” as well.
The DoJ did not comment, but the Federal Bureau of Investigation and US prosecutors are investigating some China-based companies that have accessed US markets, people familiar with the matter say.
The SEC has referred investigations to the justice department in the past where there has been evidence of criminal wrongdoing. It is not clear in this case if the DoJ has launched an investigation independently.
Ryan Detrick, technical analyst at Schaeffer’s Investment Research, said he was not surprised to see investors take money out of Chinese internet stocks.
“So much money went into these stocks on a speculative basis, on hopes for Chinese growth, rather than fundamentals,” he said.
Internet and small-cap stocks have suffered during recent market volatility, as investors have sought the safety of blue-chip dividend paying stocks. The Dow Jones Industrial Average of the 30 biggest US stocks has outperformed the smaller cap and tech-heavy Nasdaq Composite index by almost 4 per cent this week alone.
“In this environment, if a stock has any question mark hanging over it, investors aren’t willing to take the risk, with safer names available at good valuations,” said James Cordwell, a tech company analyst at Atlantic Equities.
But investors have been paying particular attention to China-based companies since June, when Muddy Waters, a research firm founded by shortseller Carson Block, accused the Chinese timber firm Sino Forest of overstating its sales.
C Ming Zhao, an analyst at Susquehanna Financial Group, said Chinese stocks were being unfairly targeted. “You have fraud at US firms too, but you wouldn’t sell Apple and Google, because of what happened at Enron.”
He said well-established Chinese stocks, with transparent accounts, should not be treated in the same way as newly listed companies.
“Stocks like Baidu and Sina Corp are being unfairly tarnished. American investors should do their homework on company fundamentals, rather than trading on news flow,” he said.