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.
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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.