Corporate Accounting: Can You Trust China?

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Can You Trust China?

Steve Orlins, National Committee on U.S.-China Relations, explains why corporate accounting in China should not to be trusted. CNBC's Jeff Cox joins the discussion.

China’s Corporate Governance Draws More Fire

HONG KONG (MarketWatch) — Concern over Chinese corporate governance is growing, with one major Hong Kong brokerage warning of increased risks of corporate fraud as the economy slows, and a noted investor casting doubt on China’s accounting.

CLSA head of Asia research Amar Gill said he was concerned that many of China’s publicly listed companies could undergo an increase in abuses, with the potential for some insiders to drain such companies of cash as if they were personal ATM machines.

Gill warned financial strains weighing on individual investors could result in cases where “controlling shareholders will use listed companies to bail out their private interests.” Gill made the remarks at a news conference to announce the results of CLSA’s 2012 report on corporate governance in Asia.

In the report, China ranked ninth of 11 markets tracked for the year, trailing behind South Korea, but ahead of the Philippines and Indonesia. China scored 45 on the 100 point scale, slipping 4 points from its previous ranking, completed in 2010.

“While economic conditions are still tough, you have more likely a negative scenario for corporate-governance surprises, and so if I had to guess for the next year, more likely than not, the average score for Chinese companies will be slightly lower,” Gill said.

The report, conducted in association with the Asia Corporate Governance Association (ACGA), examined 864 companies listed on markets within the Asia-Pacific region. Singapore ranked highest, followed by Hong Kong, Thailand and Japan.

Jamie Allen a representative from the ACGA, said there were also instances where Chinese companies were able to use state-secrecy laws to shield their books from scrutiny. He said the rules were at odds with the need for independent scrutiny of publicly listed companies. “Should a company be listed if auditors are not allowed to do their job?” Allen asked.

The report coincided with sharp criticism of Chinese corporate and government data by famed short-seller and head of Kynikos Associates, Jim Chanos.

Chanos told CNBC in an interview that he sees Chinese economic data as inaccurate and often manipulated, with corporate numbers equally unreliable, echoing longstanding criticism among some investors.

“I would take issue with almost any corporate accounting in China. It is that bad,” Chanos said.

He said Western capital flowing into China was unlikely to return, describing the nation as “a classic emerging-market Roach Motel, except it’s a really big one. ... It’s very difficult to earn adequate returns for capital and get your capital back,” he said.

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