I've written a long post at my site, re: The Auditors on the ongoing efforts of the SEC, and the PCAOB, to get a handle on the pervasive fraud by Chinese-based companies listed on US exchanges.
I have never been bullish on China for investors or otherwise. In fact, I fail to see why any rational investor or company would fool themselves into thinking this time is going to be different.
"A fool and his money are soon parted..."
I'm pleased to say that my nephew, Jack McKenna, who is in Shanghai for the summer on an internship, shares my opinion. He's learning the language so he goes out and talks to people and reads everything. He's already had his Google account suspended for whatever it is he's been reading or writing in email.
He's written a Top Ten list for me on why, based on what he's seeing, China will never overtake the US as an economic superpower:
- The Chinese economy may appear strong but it is built on instability. The 586$ Billion Dollar stimulus of 2008, intended to sustain growth, was largely allocated to government-run entities and resulted in a host of bad loans as well as detriments to the export-led growth model.
- There is currently no incentive or safety net to allow for private consumption in the economy.
- As of now, the Chinese currency (RMB) is not conducive for foreign investment. The same cannot be said for the US Dollar.
- Communist icons of population control and financial repression threaten the Communist party’s monopoly as public resistance to these practices increases.
- The hierarchical nature of traditional Chinese thought discourages financial ambition and does not support the kind of consumer driven economy that defines a superpower.
- Human rights violations prevent China from earning the respect of the global financial market and will hinder its desire for global political influence.
- The “mandate of heaven”, which gives political leaders their legitimacy, is being challenged and will lead to social instability.
- Innovation starts with education. The Chinese education traditions encourage competition for jobs and exams scores but discourage focusing studies on students’ passions.
- Much of China’s “8%” economic growth was based on the government investing in itself with public works and infrastructure spending. The growth is not nearly as impressive without internal investment.
- In order to turn profits on exports to sustain growth, the Chinese currency needs to remain low. In order to keep currency low, they need to continually buy up our debt.
Here's an excerpt from my post at re: The Auditors. Go there for more.
There have been significant developments on the issue of Chinese frauds and in the efforts by the SEC and the PCAOB to investigate and bring responsible parties to justice, including the auditors of the companies under investigation.
But none of these developments will have any significant impact on the bigger problems facing China and investment in China.
The SEC can delist questionable Chinese companies or even all China-based listings that came through reverse mergers or traditional means, as some have suggested the might do. US exchanges can increase scrutiny of new listings based in China and reject those that do not meet or continue to meet existing standards, to the letter. (This cooperation from the exchanges is less likely given political rhetoric for expanding IPOs here and their desire to reap listing fees or be “beaten” by competing exchanges in London or Asia.)
The PCAOB can work on finding a way to see into the quality of Chinese-based audit firms, first through inspection observations and eventually via on-site inspections.
The SEC's futile enforcement efforts for reverse-merger frauds reveals even bigger problems for investors and US capital markets than the losses caused by few fraudulent China-based companies. There are two implications of the SEC’s limited enforcement and the PCAOB’s lack of ability to monitor the auditors that have been ignored, for the most part, by journalists and other pundits.
- China-based auditors are also perfomring audits of significant operations of US and non-US based multinationals with US exchange listings. Those audits can not be sufficiently monitored and supervised by the primary non-China audit firm and cannot be inspected by the PCAOB, either.
- An on-site SEC investigation of accounting manipulation, fraud, or illegal acts, such as under the Foreign Corrupt Practices Act by the Chinese operation of a US listed company (or a China-based company with a US exchange listing) would be severely limited by the SEC’s limited authority in China.
