* Chinese companies' shares see extreme price swings
* Companies need PR offensive - industry analysts
* Regulators expected to eye stock moves
By Rachel Armstrong
SINGAPORE, June 29 The accounting troubles and
short-selling attacks hitting China-based companies are creating
fertile ground for the rumour mill to flourish, with some shares
hammered by chatter rather than actual evidence.
Such stock swings have created a dangerous climate for even
strong Chinese companies and put regulators on high alert for
This week, China-based meat processors China Yurun Food
Group Ltd and Zhongpin Inc. have seen huge
volatility in their shares on heavy volume, prompted more by
rumour than hard facts.
The combination of slowing global economic growth, China's
own sluggishness and growing distrust of Chinese accounting
means investors are much more sensitive to the smallest whiff
that something may be amiss.
They are right to be concerned.
A slew of Chinese companies listed in North America have
been hit by accounting problems, delistings, and negative
research reports. The volume of short sellers betting against
these companies has grown.
Some companies have come under pressure for no other reason
than they're based in China.
"Any report that comes out on these companies now seems to
hit the front pages of the business press," said Christopher
Clarke, a lawyer at DLA Piper in Hong Kong.
"There is a strong risk that companies that have not behaved
fraudulently but perhaps been a bit unsophisticated could get
In some cases, executives who quickly responded with facts
and figures to market concerns were able to stop the sell-off.
The CEO of Nine Dragons Paper Ltd struck back at
Standard & Poor's earlier this month, a day after S&P withdrew
its ratings citing the inability to access key information.
After the S&P announcement, the market sensed another
Chinese accounting scandal, and sent Nine Dragon's stock
plunging into a trading halt. The next day, the CEO came out
swinging, denying S&Ps claims and its stock recovered.
NEED FOR PR OFFENSIVE
Shares of meat processor Yurun recovered a bit on Wednesday,
though they're still well below the levels they traded before
market talk of a report likely by Muddy Waters.
Yurun lost around $2 billion in market value over the past
few trading sessions, mainly on speculation it might be the
target of a negative report by short seller Muddy Waters -- a
report that has yet to surface .
To overcome this investor scepticism, some experts say
Chinese companies need to launch a PR offensive and share
details of their financials.
"Once there's a problem in the market, you need to get on
the streets, pound the pavement and display that it's business
as usual," said David Smith, head of corporate governance
research for Asia-ex Japan at Institutional Shareholder Services
"If your reporting is understandable and you're audited by a
reputable accountancy firm then you've got something to hold up
On Tuesday, Muddy Waters did issue a report but it was on
U.S.-listed Chinese company Spreadtrum Communications Inc
The size and scale of Yurun's drop is expected to attract
the attention of Hong Kong regulators, some legal experts said.
"If something sells off suddenly, the (Securities and
Futures Commission) SFC will have a look at who the sellers are,
why they are selling and what the source of information is for
that decision," said Alan Linning, a partner at Sidley Austin in
"But it is difficult to track down the source of rumours,"
the former head of enforcement at the SFC, Hong Kong's
securities watchdog, said.
The SFC was unable to comment on the recent moves in Yurun.
Shares in Zhongpin Inc. , a fellow Chinese meat
processor traded on the Nasdaq plunged on Monday. The company
did not issue any public disclosure, nor do news searches show
any material information spreading.
The stock went through wild swings on huge volumes, at one
point falling 18 percent before recovering to nearly where it
"Given the way the market is and the scepticism that's been
building, I can only expect there are going to be more stocks
sold off like this," said Todd Martin, Asia equity strategist at
(Editing by Michael Flaherty and Anshuman Daga)