SHANGHAI (Reuters) - China is looking into accounting issues involving Chinese companies listed in North America, an official at the country’s securities regulator said in the watchdog’s first public remarks since a series of accounting scandals.
Corporate misbehaviour, unfamiliarity with the U.S. market and some practices involved in overseas listings had all contributed to recent investor distrust of Chinese companies, said Wang Ou, vice head of research at the China Securities Regulatory Commission (CSRC).
“First, we have to admit that some of our companies may have flaws. Second, our (companies’) understanding of the U.S. market and the measures to tackle risk there may be inadequate,” Wang said at a conference in Beijing this weekend.
“We have contacts with the U.S. and its relevant regulatory bodies and we’re studying the issue together.”
Reuters saw the footage of his comments in a video posted on the China Business News website.
Investors have sold off foreign-listed Chinese companies in recent weeks following a flurry of accounting scandals and fraud allegations.
On Monday, shares in meat processor China Yurun Food dived 20 percent on market speculation that short-seller Muddy Waters was about to issue a negative report on the company.
Wang’s comments coincide with a visit to Beijing by officials from the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board.
The delegation arrived in Beijing to meet Chinese regulators to discuss cross-boarder oversight, hoping to sign an agreement on accounting supervision by the end of this year, the official Xinhua News Agency reported on Friday.
However, experts are doubtful whether there is much the CSRC can do to deal with the situation as most of the Chinese companies listed overseas have an offshore parent company.
“All the CSRC is likely to do is to try to stop Chinese companies from listing abroad without their permission, but it’s a difficult problem for them because they really don’t have jurisdiction over them, so these companies fall into a regulatory black hole,” said Paul Gillis, visiting professor of accounting at Peking University’s Guanghua School of Management.
Much of the questionable accounting has involved reverse mergers, a type of backdoor listing in which a foreign company merges with a U.S. shell company.
To overcome regulatory hurdles, many Chinese companies have also set up legal structures under which control of a mainland-based company can be transferred to an overseas entity via certain contracts.
CSRC’s Wang said this practice would expose Chinese companies to potential legal risks, another source of worry for overseas investors.
Peking University’s Gillis said the main priority for China should be to tackle the practices that lead to the scandals in the first place.
“What I would expect to see is not really the CSRC but other Chinese regulators starting to enforce rules on the corruption that’s taking place,” he said.
“I would say the real enforcement needs to be by the Ministry of Justice and other law enforcement agencies.”
Reporting by Samuel Shen, Kazunori Takada and Rachel Armstrong in SINGAPORE; Editing by Chris Lewis and Vinu Pilakkott