Saturday 20 August 2011

Chinese Protest $5 Billion Losses Tied to U.S Reverse Mergers

Four wrinkled pieces of paper are all that remain of Xiong Renzhi’s Nasdaq-fueled dream of a comfortable retirement in the southern Chinese city of Nanchang.

The certificates gripped in the former electrician’s sinewy hands represent 46,000 shares of Xi’an Xilan Natural Gas Co., which he bought in 2006 for 166,000 yuan ($25,990) by selling his apartment and moving in with his sick mother-in-law. Xiong, 62, said he expected returns many times his outlay when the natural-gas distributor listed on New York’s Nasdaq Stock Market, which it did on June 5, 2009.

Like thousands of Chinese who bet their life savings on companies aiming for U.S. listings -- some of them among firms that later cost U.S. investors billions of dollars -- Xiong and his wife are still waiting for a payout.

“We put all our eggs in this one basket,” said Xiong, who writes articles online to support protests in the financial capital of Shanghai by others who claim they’ve been cheated. “Is the company going to exploit us for nothing?”

Xiong and as many as half a million Chinese who spent an estimated 35 billion yuan ($5.48 billion) on similar investments want authorities to ensure they get their money back. They bought into companies touted by local officials, investors said, only to have their share purchases later deemed illegal by the central government.

Public Protests

Hundreds have vented their anger in four protests since May led by a wheelchair-bound retiree, Lu Yafang. One desperate man last year publicly attempted suicide. All are victims of a failed Chinese experiment with capital markets, said Xiong.

Xiong’s experience shows how little oversight there is in the burgeoning Chinese securities market. Local and foreign investors have been burned by companies that skirted regulations on fundraising while cloaking themselves in government authority. Now that investors have lost money, they’re finding the government is offering them little protection.

“The Chinese government hasn’t bothered to create real financial markets, where you have the infrastructure that rewards good behavior and punishes bad behavior,” said Arthur Kroeber, managing director of Beijing-based GaveKal Dragonomics Research, a financial advisory firm. “In a country where legal institutions are weak, there are lots of opportunities for retail investors to get ripped off.”

Reverse Mergers

At least 16 firms based in Xi’an, the capital of Shaanxi province in China’s northwest, joined more than 400 Chinese businesses that gained stock-market listings in North America by buying public shell companies -- a strategy known as a reverse merger that avoids the scrutiny of an initial public offering.

Investors in U.S.-listed Chinese companies, including former American International Group Chief Executive Officer Maurice “Hank” Greenberg’s C.V. Starr & Co., have lost more than $7 billion this year in plummeting share values as at least two dozen firms revealed accounting flaws or auditor resignations. U.S. securities regulators are investigating.

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