U.S.-Listed Chinese Stocks Deserve a Fresh Lookhttp://www.fool.com/investing/general/2013/11/20/us-listed-chinese-stocks-deserve-a-fresh-look.aspx James Shaw
November 20, 2013
The past two years have been devastating for U.S.-listed Chinese stocks, but the summer of 2013 may have marked the bottom. After a long period of optimism that began with successful technology dot-com IPOs like Baidu (NASDAQ: BIDU) and Sina (NASDAQ: SINA), Cornerstone Research estimates that U.S.-listed Chinese companies lost $26.5 billion in combined market capitalization from 2010 to 2012. As many investors remember from 2011, the sector was crushed under SEC scrutiny and relentless short-selling. However, in just the past few months, signs of rebirth are emerging from the dust of this sector's implosion. The former darling sector that became so despised two years ago may yet offer bargains today.
Since the turn of the millennium, Chinese companies have extracted billions of dollars from U.S. stock markets. Attracted to the U.S. by a regulation forbidding non-Chinese ownership of Chinese Internet companies and further encouraged by American optimism during the Internet boom, more than 600 Chinese companies fled local capital markets and tapped into American wealth via IPOs, reverse mergers, or reverse takeovers, known as RTOs. This influx peaked in 2010, with dozens of RTOs and 41 IPOs in a single year.
Regulators and lawyers, however, had begun taking notice of the massive amount of investment dollars flowing into China from these U.S. listings. Major fraud and accounting problems surfaced in 2011. By the time 2012 had passed, class-action attorneys had filed lawsuits against 70 of these companies. In 2011 and 2012, there were a total of just 17 IPOs.
Superstar investors like John Paulson and Fidelity's Anthony Bolton lost hundreds of millions on one fraudulent Chinese company called Sino-Forest, which filed for bankruptcy after boutique analyst Carson Block exposed it as a Ponzi scheme. Exchanges delisted dozens more U.S.-listed Chinese frauds like RINO Corporation and China Media Express. The SEC accused Big Four accounting firms of violating securities laws in the sector, refusing to produce audit work papers, and obfuscating investigations.
Wealthy investors like Paulson lost millions individually during the sector's meltdown in 2011, but working-class Americans lost billions. Among the biggest shareholders in now-bankrupt U.S.-listed Chinese company Longtop Financial Technologies were mutual funds managed by household names like Fidelity, Janus, and Legg Mason.
The resurgence of late 2013
Chinese IPOs in 2013 easily outnumber and outperform last year's two entries. In addition to the success of Chinese IPOs this year, Forbes and The New York Times have highlighted the resurgence of U.S.-listed Chinese shares during the past few months. Shares of Sina, Baidu and all the above Chinese IPOs have soared this year. Peter Fuhrman, chairman of an investment bank in Shenzhen, China, explained to The New York Times that the hostility of American investors toward Chinese companies is "easing." Likewise, hedge fund manager Paul Conway explained to Reuters that he is encouraged by the discounts available in U.S.-listed Chinese stock pri