Chinese Companies Listed In The US: Trust Crisis And Countermeasures

Since the RINO event happened at the end of2010, Chinese companies listed inthe United States have suffered a serious crisis of confidence, and are still under itsinfluence. In this paper, the author hopes to find the cause of this trust crisis and toprovide countermeasures to Chinese companies listed in the US, as well as looks farahead into the Sino-US securities regulatory cooperation. In this paper, on the basis ofanalyzing the RINO event, the different causes for the crisis are summarized. Fromthe perspective of the Chinese companies, the lost of credibility is the subjectivereason. Dishonesty frequently occurs in the US securities markets, such as overstatedprofits, misstated data, and related transactions not disclosed and contract fraud.These issues should have been found in the interior supervision of the company, butthe irregular internal management prevents the audit committee, independentdirectors and the board of supervisors in the company from fully playing theirsupervising functions. Another important reason is the short selling behavior of themarket research organizations that are active in the U.S. stock market, especially twocompanies of Muddy Waters and Citron who focus on Chinese companies. Ininvestigation, such institutions usually adopt the ways of data comparison and fieldsurvey, so have great lethality for some Chinese companies that have fraud activities.Besides, it should not be ignored that the securities regulatory systems of China andthe US are quite different, whether in the securities issue system, prospectus,continuous information disclosure or in the regulatory system. These also hinder theadaptation of the US-listed Chinese companies to the US securities regulatory system.Finally, the conflict of laws of China and the US will make the Chinese companieslisted in the US face a dilemma. The US Sarbanes-Oxley Act requires the accountingfirms, which provide auditing service for the listed companies, to submit audit draftsbased on “the principle of long-arm jurisdiction”, but it is illegal to provide audit draftto foreign organizations according to the relevant laws of China. This requiressecurities regulatory authorities of both parties to resolve this contradiction on the basis of consultations. With regard to the countermeasures, several suggestions aregiven from the perspectives of companies and regulatory cooperation in this paper.The companies shall have the concept of honesty and credibility; select the way ofinitial public offering; get familiar with the institutional norms of the US; establish agood communication system; improve their management structures and takecountermeasures to cope with the short selling. In the aspect of regulatorycooperation, the author first compares the memorandum signed for the regulatorycooperation between China and the US with those similar cooperation contractssigned by the US with other countries/regions, and find that we can not always avoidthe problem of “joint investigation” with the US, but shall play a dominant role in theinvestigation. And the problem of “national secret and commercial secret” that troublethe parties shall be defined clearly by listing a list, and shall not be too general tobecome an umbrella protecting those fraud companies. In addition,“the range ofassistance” can be extended appropriately, not only to assist individual cases but alsoto provide comprehensive assistance. Finally, the author thinks that China and the USshould carry out more extensive cooperation based on the platform of the IOSCO.