Many U.S.-listed Chinese companies should be delisted because the Chinese Communist Party protects them from fraud, said Carson Block, founder of Muddy Waters Research, a leading short-seller, on Wednesday.
Speaking at the WSJ Risk & Compliance Forum on May 5, Block said many Chinese companies should be delisted from the U.S. market.
Brock said there are about 400 Chinese-owned companies listed in the U.S. that are effectively outside the jurisdiction of U.S. investigations and enforcement because the Chinese Communist Party has built a moat of fraud for these companies.
In late 2020, the U.S. government passed a new law that bans foreign companies whose trading audit documents have not been inspected by U.S. regulators for three consecutive years.
Some investors believe the law will eradicate fraud, especially by overseas companies.
But that’s not really the case for Brock, especially for Chinese companies listed in the United States.
Brock, the founder of Muddy Waters, which has repeatedly published reports exposing corporate wrongdoing, has started a business in China, is fluent in Mandarin and has a long history of following and researching A-shares.
In an interview with the media, Bullock said that doing business in China is “a slaughterhouse” and that it is too difficult to make a profit from the industry, and that any business, if someone does it, will be surrounded by competitors overnight.
In early 2010, Brock received a request from his father in the U.S. to help him investigate Oriental Paper, a U.S.-listed company in China.
So Brock and his USC classmate Sean Regan staked out the gates of Orient Paper and found that the paper mill, which was raising about $4.9 million to expand its production line, had only one empty truck turning around for an hour and a half, instead of the at least 100 trucks they had predicted would be busy with traffic.
Before the report was released, Brock incorporated Muddy Waters Research in the United States. In the company profile, Bullock explained the origin of the name: “Muddy Waters” is derived from the Chinese word for “muddy water and fish”.
The Muddy Waters investigation focused on three main areas, namely, fundamental issues, business fraud, and accounting fraud. In the method of investigation, the corresponding is to review information, investigation of related parties, company field research, investigation of suppliers, research customers, interview competitors, industry experts, revaluation of the company, etc..
Bullock has told the media that if a company’s profits, profitability or sales are too good to be true and its performance is not affected by due industry cycles, then Muddy Waters may put these companies on its investigation list.
The shorting of Kahan Forestry is one such story.
In 2011, Bullock found that Cahan Forestry’s earnings numbers were questionably perfect and began an investigation. The subsequent shorting report called Gahan Forestry a “Ponzi scheme” that exaggerated assets and falsified sales transactions.
In 2012, the company filed for bankruptcy reorganization, and in July 2017, the Ontario Securities Commission in Canada, where the company was listed, issued a ruling in the company’s case, finding that the company and its former CEO, Deyuan Chen, had committed fraud in relation to its forestry assets and revenues.
From 2010 to early 2020, Muddy Waters has shorted a total of 35 companies, including 18 Chinese stocks, including GreenNow International and RuiXing, which admitted to fraud, and China High Speed Channel and Diversified Global Water, which were delisted, of the 18, up to 9 were delisted.
Most of the Chinese stocks were shorted due to the existence of more or less financial fraud, deteriorating fundamentals, valuation bubbles and other problems.
Bullock has said that 20% to 30% revenue inflation is often “normal” or widely accepted among mid-cap companies.
In addition to Bullock’s public appearances, other members of Muddy Waters have been invisible behind the scenes. Bullock has asked reporters to refrain from taking pictures because he has received death threats.
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