Friday 30 September 2011

Bad news from China, interesting report about Chaoda

A report written by a group calling themselves "Anonymous Analytics" wrote a detailed report about Chaoda. It looks well researched and written, but I can't vouch for the quality of it. If it is true then it is very damaging for Chaoda and for China listed companies in general since Chaoda is a quite high-profile company, and listed for a decade.

Other articles from Reuters about problems in China:

Bosses in China go into hiding over big debts
Punishing rates of underground loans amid credit squeeze taking its toll
(BEIJING) A string of Chinese entrepreneurs have gone into hiding to avoid repaying loans, according to state media reports, highlighting a credit squeeze on private firms and the dangers of steep interest rates in China's vast and growing informal lending market. Many cash-strapped firms are unable to borrow from banks amid a credit clampdown by Beijing, and some have turned to China's underground lending market - which pools money from individuals and firms - at annual interest rates as high as 100 per cent.
The staggering rates, at more than 15 times China's benchmark lending rates, have pushed some firms to the limit. In just one day last week, Chinese media reported that nine bosses of small-sized firms in China's entrepreneurial capital of Wenzhou, in eastern Zhejiang province, had skipped town after realising they could not repay their corporate loans. 'The private lending craze has fuelled an economic bubble, and the 'runaway episode' in Wenzhou is a landmark event in the bursting of such a bubble,' the official Financial News, a paper run by China's central bank, said in a report on Wednesday.
Among the bosses who have reportedly gone into hiding is the chairman of one of Wenzhou's prominent spectacles makers, Zhejiang Center Group Co Ltd. The well-known firm had harboured ambitions of a public stock listing, the China Business News said, but problems started in 2008 when it was squeezed by falling overseas orders, rising raw material costs and a firmer yuan. Citing sources with knowledge of the matter, the newspaper said that Zhejiang Center owes its suppliers some 50 million yuan (S$10.1 million) to 100 million yuan.
Calls by Reuters to the company's main number went unanswered.
'Seven days after his (the board chairman's) disappearance, a few company managers are still reporting for work,' China Business News reported after a visit to Zhejiang Centre's Wenzhou office. 'But they are at a loss as to what they should do now.' Zhejiang Centre's website says that it employs around 3,000 people and has annual export sales of 500-600 million yuan.Chinese officials have said repeatedly that they have detected no large-scale collapses among small firms in the country and that they do not face extreme credit shortages. That point was reiterated on Wednesday by Lu Zhongyuan, vice-head of Development Research Centre, a cabinet think tank.
'Difficulties that small companies face are not mainly caused by tight credit,' Mr Lu said. 'The biggest problem faced by small firms is the rise in costs.' For the wealthy in China, lending their savings to firms at annual rates starting at around 36 per cent is more lucrative than putting their money in banks that give negative returns.China's one-year deposit rate stands at 3.5 per cent, under the central bank's 2011 inflation target of 4 per cent and significantly below actual inflation which recently has exceeded 6 per cent. A thriving underground lending market has bloomed amid savers' zeal to put their money to better use. The central bank estimated that the market was worth 2.4 trillion yuan as at the end of March 2010, or 5.6 per cent of China's total lending.
'Speculative private lending has increased this year and has deviated from actual credit needs of the economy,' said Fu Bingtao, an analyst at Agricultural Bank of China. Mr Fu said that the risks to China's economy, the world's second largest, could be contained since the rampant lending is outside of the banking system and such loans are generally not used to fund speculative bets. However, in its annual survey of Chinese banks released this month, accounting firm KPMG noted that credit woes faced by one small firm can affect its peers through 'debt triangles'. This happens when a firm that is short of cash delays payments to its suppliers, causing suppliers to suffer cashflow problems which in turn can affect others higher up the supply chain.
Banks are also not entirely insulated. Savers' reluctance to put their money in banks has sparked a 'war for deposits'.To win deposits, banks are paying for depositors' holidays within the country or their children's education, and offering job opportunities to their relatives, the Financial News said.Yet, for cash-rich savers, times are sweet.An investment consultant in Beijing, who only gave his surname, Bai, told Reuters that he remits his salary back to the northern Chinese province of Hebei each month for his mother to lend to businesses. 'The money that I lent at the start of the year had annual interest rates of 10 per cent. Now rates have risen to 50 per cent,' he said. 'My 100,000 yuan of savings has grown to nearly 150,000 yuan.'
But firms cannot afford such sky-high rates, said Zhou Dewen, head of the association for small- and medium-seized enterprises in Wenzhou. Many earn profit margins of between 3-5 per cent, so loan defaults may spike if rates do not ease next year. Even Mr Bai is worried for his borrowers. 'My neighbours at home are lending at annual rates of 150 per cent,' he said. 'Which industry can enjoy such high profit margins? It's not like they are trafficking drugs.' - Reuters

US Justice Dept probing Chinese accounting
WASHINGTON - The US Justice Department is investigating accounting irregularities at Chinese companies listed on US stock exchanges, said an official with the US Securities and Exchange Commission, suggesting criminal charges may be brought in addition to civil proceedings.'There are parts of the Justice Department that are actively engaged in this area,' Robert Khuzami, director of enforcement at the SEC, said in an interview on Tuesday.
He told Reuters that a number of federal prosecutors around the United States were taking part in the investigation, but he declined to name them.Involvement of US attorneys general in various locations adds investigative firepower to the SEC and the Federal Bureau of Investigation, which are also probing the accounting methods of certain US-listed Chinese companies.'I think that you will see greater (Department of Justice) involvement as time goes on,' Mr Khuzami said when asked if criminal charges would be filed in the investigation.
A former federal prosecutor, he declined to elaborate on which Chinese companies or auditors were being scrutinised by the Justice Department.An SEC review of accounting problems at foreign-based stock issuers sharpened its focus earlier this year when dozens of China-based companies began disclosing auditor resignations or book-keeping irregularities.For example, Deloitte Touche Tohmatsu CPA Ltd in May resigned as auditor of Chinese software company Longtop Financial Technologies Ltd, saying it had found falsified financial records and bank balance confirmations.
Shares of some Chinese companies listed in the United States fell on Thursday after Mr Khuzami's statements became public. Among them, closed 4.7 per cent lower at US$50.62, Baidu fell 9.2 per cent to US$110.29, China Sky One Medical declined 3.8 per cent to US$2.29, and Sina Corp ended down 9.7 per cent at US$73.23.The SEC has struggled to gain access to documents it needs in the investigation because strict Chinese laws have made auditors reluctant to turn them over.The FBI has an embedded agent in an SEC working group on Chinese companies that enter the stock market through so-called reverse mergers with US shell companies.
Officials from the SEC and the Public Company Accounting Oversight Board (PCAOB) are due to meet with their Chinese counterparts in Washington, DC in October for a second round of talks on joint inspections of auditing firms in China.'Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue,' Mr Khuzami said. 'It is ... a big issue for us.'Earlier in September, the SEC sought a federal court order to force the Shanghai arm of Deloitte to turn over its work papers regarding Longtop Financial.
The results of the Deloitte subpoena enforcement action will be closely watched by other auditing companies, Mr Khuzami said. The federal government is also pursuing other options to ensure better accounting practices at US-listed companies based in China, he said.'Obviously, the results here will inform the conduct of others that are similarly situated. In that sense, it's going to be instructive,' Mr Khuzami said. 'At the same time, we're not a one-trick pony; There are other efforts to reach resolution of these issues. We continue to work closely with our regulatory counterparts in China and in other countries to find a path to resolution.'
In a recent interview with Reuters, Assistant Attorney General Lanny Breuer, head of the Justice Department's criminal division, underscored the government's commitment to fighting accounting fraud of any kind. He declined, however, to comment on specific cases that could be brought against Chinese firms listed in the United States.The Justice Department declined comment for this story, saying it does not confirm or deny investigations.In any criminal case, the question would be whether the company lied to the auditor, or whether the auditor acted recklessly or knowingly in not detecting the alleged fraud.Merely not providing records under these circumstances - as in the Deloitte case - would not likely rise to the level of criminal violation, Mr Khuzami said. The PCAOB, the agency that oversees auditors of public companies, has inspection authority over auditing firms, while the SEC has enforcement authority over those companies.Together, the two agencies have greater leverage over auditing firms than do criminal authorities, Mr Khuzami said. -- REUTERS

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