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Tuesday, August 14, 2012

Why Chinese Companies Are Withdrawing from U.S. Stock Exchanges


Chinese companies are withdrawing their listings from U.S. stock exchanges. There is no real mystery: First, Chinese companies cannot (and do not wish to) meet U.S. accounting standards. They are largely state owned or directed. They usually operate on the basis of informal agreements and must hide corruption. Second, U.S. markets are driving down their share prices.  Their withdrawal from U.S. stock markets is supported by the Chinese government which is providing loans for that purpose.

Stock markets play the role of “price discovery.” They let investors decide what companies are worth. For example, the recent debacle of the Facebook IPO revealed that Facebook’s value was less than expected.

Chinese companies are withdrawing because stock-market investors have concluded that the companies of Chinese state capitalism are worth less than what had generally been expected. Once short sellers started investigating the goings-on in Chinese companies, their share prices plummeted.

Chinese authorities must withdraw their companies quickly from this price discovery process. If it continues, it will show that Chinese companies are overvalued once their true operating practices are known.

China cannot let its image of success and growth be tarnished.

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