Foreign companies are increasingly leery of setting up factories in China - which the country often requires as a prerequisite to selling products there - because of widespread theft of technology and trade secrets.
Reuters' investigation into accounting fraud at Chinese companies listed in North American exchanges reveals a number of massive cases which blind-sided unaware investors.
The China Securities Regulatory Commission says it is actively fighting illegal activities and announced on its website this month that it's taken on 83 new cases of market malpractice in the first half of this year, including 45 cases of insider trading.
Still, the practices are so prevalent that they have been given colorful nickname in Chinese, such as "rat trading" for insider trading, or the "black mouth," an expression for a commentator who manipulates the market by talking up companies in which s/he's taken stakes.
Conclusions
To use the now famous Bushism: "Fool me once, shame on - shame on you. Fool me - you can't get fooled again." Jokes aside, there is a mounting body of evidence showing the Chinese culture has different operating standards (which in Western culture would be viewed as fraud, lying, cheating, stealing, etc.) which compounds pervasive intellectual property theft with widespread wrongdoing in China's capital markets, ranging from accounting fraud, illegal stock price manipulations, and insider trading.
The Chinese government is well aware of the problem. They publicly condemn the poor business practices, but by removing financial and tax fraud from the list of capital crimes earlier this year, they hardly send a dissuasive message.
With the problems rampant and spreading to the largest Chinese corporations, combined with a chronic lack of transparency, we are relegating Chinese investments to the speculative risk class. This applies both to direct investments in Chinese companies and foreign companies with an important Chinese dependency.
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Andreas Schreyer is editor and publisher of The Green Investor.
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