Chinese Stocks in US Plummet In Wake of Justice Department Investigation

Prices of US-listed Chinese stocks fell on Thursday after reports emerged that the US Justice Department was investigating into accounting irregularities at several Chinese companies listed on US stock exchanges.

Prices of US-listed Chinese stocks fell on Thursday after reports emerged that the US Justice Department was investigating into accounting irregularities at several Chinese companies listed on US stock exchanges.

The drop was sparked by a Reuters report, citing the Securities and Exchange Commission’s Director of Enforcement Robert Khuzami, which indicated that the US Justice Department had been scrutinising Chinese companies and their auditors, due to a spate of auditor resignations and bookkeeping irregularities.

Deloitte Touche Tohmatsu CPA Ltd, for example, resigned as the auditor for Chinese software company Longtop Financial Technologies Ltd in May, claiming that it had found falsified financial records and bank balance confirmations.

[quote]”Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue,” said Khuzami. “It is … a big issue for us.”[/quote]

The fallout from the report hit Chinese internet companies the hardest as their stocks began to plunge dramatically in the immediate aftermath. Share prices in Baidu, the search engine company, fell by 9.2 percent to $110.29, while e-commerce site Sina experienced losses of up to 9.7 percent to $73.23 on Thursday. The video streaming site Youku, a Chinese competitor for Youtube, was the hardest hit – falling by 18.3 per cent to $16.24.

In an interview with the Financial Times, Ryan Detrick, a technical analyst at Schaeffer’s Investment Research, told the paper that he was not surprised to see investors take money out of Chinese Internet stocks.

[quote]“So much money went into these stocks on a speculative basis, on hopes for Chinese growth, rather than fundamentals,” he said.[/quote] [quote]“In this environment, if a stock has any question mark hanging over it, investors aren’t willing to take the risk, with safer names available at good valuations,” added James Cordwell, a tech company analyst at Atlantic Equities.[/quote] 

However there are some who believe that Chinese companies have been unfairly targeted by investors and speculators. 

[quote] “You have fraud at US firms too, but you wouldn’t sell Apple and Google, because of what happened at Enron,” said C Ming Zhao, an analyst at Susquehanna Financial Group. “Stocks like Baidu and Sina Corp are being unfairly tarnished. American investors should do their homework on company fundamentals, rather than trading on news flow.”[/quote]