(Adds data on Chinese manufacturing survey in paragraph 8,
updates to close)
By Rodrigo Campos
NEW YORK Jan 23 A judge's move to sanction
auditors of U.S.-traded Chinese stocks at best muddies the
picture of investing in those companies, not long after a period
when accounting scandals hit many of the shares hard.
The stocks ended sharply lower on Thursday, after a U.S.
Securities and Exchange Commission judge ruled that the Chinese
units of the world's top accounting firms should be suspended
from auditing U.S.-listed Chinese companies.
The market value of Chinese companies listed on the New York
Stock Exchange and Nasdaq Stock Market comes to more than $1.4
trillion, according to data from the exchanges and Thomson
The ruling, issued Wednesday, raises the possibility that
companies could see their listings temporarily suspended if the
accounting giants fail to appeal successfully. It also could
short-circuit forthcoming U.S. listings from China.
Whether it will have a continuing effect on the stocks is
another matter. The suspension does not take effect immediately,
and the "Big Four" have said they will appeal, so some investors
are likely to use the selloff as a buying opportunity.
"I don't think this has changed the risk that has existed.
It has brought it more to light and put it more on the
forefront," said Malcolm Polley, president and chief investment
officer of Stewart Capital Advisors in Indiana, Pennsylvania.
"People were willing to look past the potential issues with
the stamp of a 'Big Four' firm, (but) you can't do that," he
An index of stocks of Chinese companies traded on U.S.
exchanges fell 3.6 percent to its lowest in two months.
A private-sector survey showing China's factory sector
contracted in January for the first time in six months
contributed to the selling.
Among the biggest losers were Internet services provider
Baidu Inc, down 6.2 percent, and SINA Corp,
down 5.9 percent, on heavier-than-usual volume. The U.S. shares
of Petrochina , the country's largest stock
by market value, fell 3.1 percent.
Securities and Exchange Commission Administrative Law Judge
Cameron Elliot censured the Chinese affiliates of KPMG
, Deloitte, PricewaterhouseCoopers
and Ernst and Young.
Baidu is audited by Ernst & Young's China unit, while SINA
is audited by PWC's China unit.
"I believe this is the primary reason why U.S.-listed China
companies' shares are down today," said Carson Block, head of
Muddy Waters Research and a short seller who has exposed several
accounting frauds at Chinese firms.
The decision is not yet expected to disrupt the U.S.
listings, but if the firms are unsuccessful in their appeal,
which could take years, the companies would need to find a new
auditor during the suspension period or else be unable to file
accounts, which could then cause their shares to be suspended.
The ruling may also affect a wave of Chinese listings in the
United States that were expected to return this year. Last
year's U.S. market rally re-ignited a push by China-based
companies to seek stock offerings on U.S. exchanges.
Market insiders, however, say that despite the selling, the
risk for investors is minimal.
"At the earliest it would be May 2015 for these companies to
start to delist, so there's a long time between now and then,
and we think the parties reaching a deal within that time is
reasonable," said a trader in Asian ADRs for a top Wall Street
bank, who declined to be named because he is not authorized to
speak to the media.
"Fast money, retail money, is selling, and institutional
money is going to view this as an opportunity to buy and add to
positions," he said. "The institutions we speak to share the
view there's no real risk of delisting."
Shares of Chinese companies listed in the United States
through reverse takeovers - popular during the last decade as a
way to list in U.S. exchanges with fewer regulatory hurdles -
were hit hard.
Shares of Tal Education Group fell 8.2 percent in
their largest decline since August 2012. Online dating platform
Jiayuan fell 7.8 percent.
SECRECY LAW IN CROSSHAIRS
In his ruling, Elliot said the companies "willfully" failed
to give U.S. regulators the audit work papers of certain Chinese
companies under investigation for accounting fraud. Auditors
have refused to turn over these papers for fear of violating
Chinese secrecy laws.
"This is going to put more pressure on the firms but will
not help resolve the real issue," said James Lee, regional
director for Greater China at the Institute of Chartered
Accountants in England and Wales.
"Any firm taking over the existing audits will face exactly
the same impasse."
For years, the SEC had little success in gaining access to
audit work for U.S.-listed Chinese companies. Several companies
have since been hit by accounting scandals.
"I suspect this will be the start of a new round of
negotiations. The SEC is making its intentions clear but has not
taken any action yet," said Paul Goodwin, chief analyst for
Cabot China & Emerging Markets Report, an investment letter
specializing in emerging market equities.
"This is raising the stakes in this long-running skirmish
between China and the SEC," said Goodwin.
"Trying to pressure the auditors to make their audits more
rigorous is an excellent way and perhaps a more effective way
for the SEC to try to eradicate fraud in the marketplace as
opposed to the SEC trying to decide individually which companies
are frauds or not," said Sahm Adrangi, chief investment officer
at Kerrisdale Capital in New York, a hedge fund that has in the
past bet against U.S. listed Chinese companies."
(Reporting by Rodrigo Campos, Dena Aubin and Daniel Bases;
Editing by Steve Orlofsky, Rosalind Russell and Jonathan Oatis)