Bloomberg: China Should Dive in to Those Muddy Waters

December 4, 2012

A quick recommendation here for a William Pesek column in Bloomberg about China short sellers, specifically Carson Block’s Muddy Waters. Pesek argues that instead of demonizing short sellers and throwing up road blocks to thwart their research capabilities, China should embrace these folks since they operate to uncover corruption, fraud and other irregularities that will ultimately help the Chinese economy.

I’m a big fan of the fantasy genre, and in that spirit, I’m squarely behind Pesek’s suggestions for the Chinese government.

Rather than circle the wagons against Block, China should realize that some good can come from his tactics. Many of China’s companies need serious scrutiny.

[ . . . ]

What the Blocks of the world do, if they are acting ethically, is question the status quo. They poke holes in profits that look too good to be true, balance sheets that are too opaque for comfort and executives who use mergers and acquisitions to hide weaknesses or losses. China could do with its own swarm of market players doing just that.

China definitely needs work in the areas of transparency and corporate governance, and as Pesek says, “pressure from the outside” is generally a good thing. But as the U.S.-China auditor dispute (which I just wrote about earlier today) shows us, transparency is a great idea until you start losing money as a result. Then it’s time to circle the wagons and fight off the invaders, even if doing so is short sighted.

Speaking of which, Muddy Waters, Citron Research and the other short sellers out there are foreigners, who have given Chinese firms a lot of grief. No way the government will side with these guys against the home crowd. Foreign short sellers are the perfect illustration of the conventional wisdom that “the West wants China to fail.”

Pesek’s advice is correct and his Op/Ed, which he knows is fantastical, is highly recommended regardless.

One thought on “Bloomberg: China Should Dive in to Those Muddy Waters

  1. D

    Muddy Waters and others are doing what Chinese journalists and foreign journalist can not do: conduct forensic and investigative business reporting. Chinese firms could and would do this type of reporting if they did not worry about repercussions from the Chinese government or local establishments. It is embarrassing and depressing to witness this slow train wreck in China.

    There is a cottage industry in China that gets investors and companies — many of whom have nowhere near the types of revenues their foreign compatriots have when they list — into the public foreign markets. Nothing wrong with that, but it is an industry that combines accountants, lawyers, analysts, and investors in a loose cabal that ultimately shirks investors. I was reading YY’s prospectus (they just listed in the US) and I see potentially dubious info in there from a company I personally sent multiple cease-and-desist letters to in China in the past. That company has been part of many Chinese tech IPOs in recent years, and unraveling them I think will unravel many of these IPOs. My obvious suggestion to anyone wanting to do more investigations: follow the money and the relationships.

    Most of us stand to gain by not calling out the situation, and that is why I am still vague above. But I guarantee you the following: in the next 5 years we will see a few GP/LP investors and a few more C-level execs of Chinese listed companies either accused of or found guilty of insider activities, fraudulent accounting, or the like.