Friday, June 24, 2011

No need to fuss over the short sell of 'China concept stocks'

Just as discussions on the launch of an international board in China are picking up, traders in the U.S. are busy short selling China concept stocks, Chinese companies listed on foreign exchanges. At the closing bell on June 10, the Nasdaq China Index had fallen to 196.83 points, a one week drop of 8.8 percent. dropped 23.6 percent. dropped more than 24 percent. And Sina Corp., a Chinese Web portal operator and owner of the Twitter-like Weibo microblogging service, plunged almost 30 percent.

These three companies have no record of fraud or other accounting impropriety. The plunges seem to be a part of a wider turn of sentiment against China concept stocks. Affected by the spread of panic in the stock market, many innocent stocks have also seen their values plummet. For China concept stocks, it's a challenge. But it also means these stocks may enjoy a faster growth rate, currying favor with investors.

The value of misjudged stocks will rise sooner or later. For example, shares of China-based Taomee Holdings Ltd. fell 8 percent after their stock market debut. But its stock bucked the trend on June 10, rising 24.06 percent to close at US$10.21, 13.4 percent higher than its US$9 issue price. This new company, which operates a website for children, has led the rebound in China concept stocks. Whether its gains stand the test of time will depend on the company's fundamentals.

As we all know, since China concept stocks listed in the U.S. in the 1990s, U.S. capital markets, especially the Growth Enterprise Market ("GEM") led by Nasdaq, have made great contributions to the internationalization and securitization of Chinese enterprises. This process brought win-win results for both China and America. The U.S. capital markets have benefited from large-scale China concept stocks listing on U.S. markets, with stock exchanges and investment banks winning business and investors finding opportunities to share the fruits of China's rapid economic growth. Meanwhile, Chinese enterprises have tapped into a larger pool of capital, fueling their brisk expansion.

The reason for the short selling of China concept stocks in the U.S. stock market is simple: Many Chinese enterprises have cooked their books or failed to publish the financial information required under U.S. law. At current, nearly 20 companies have been suspended or delisted since March. Some of the managers at these firms may not know how to run a company properly. But they know how to cash out, taking the money raked by their IPO and running. These tricks are not only employed by Chinese managers, but also common in American companies.

In essence, telling a speculator not to arbitrage an imbalance in capital markets is like howling at the moon.

When speculators trained their crosshairs on China concept stocks, a number of Chinese firms were certainly unfairly attacked. But we have to admit that the capital market has always been a fictitious game. Without traders' bouts of irrational exuberance and gloom, the phrase "China concept" probably wouldn't catch so much attention in stock exchanges on the other side of the world in the first place. Who would be interested in analyzing a Somali concept stock, even if the pirates have better profit model?

(This article was first written in Chinese and translated by Li Huiru.)

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