The last few years have brough huge numbers of stock scams involving Chinese companies that have resulted in American investors losing billions of dollars.  In just the last two years more than 70 Chinese companies have been delisted from NASDAQ and the New York Stock Exchange due to fraud and other financial misdeeds.  Many investors looking for large and quick returns on their investments have been pouring money into the stock of Chinese companies without knowing much about the companies.  Part of the problem is that while the Securities and Exchange Commission uses audited statements of companies to look for evidence of fraud and scams, the Chinese government has had a long standing policy of not allowing auditors to have access to the financial records of many Chinese companies by arguing that to do so would divulge state secrets.  Despite this fact, the SEC has allowed these Chinese companies to sell their stock in the United States.  The SEC has, in turn, filed lawsuits against five American auditing firms including Deloitte alleging that the companies have willfully refused to provide internal working papers of Chinese companies that have been accused of fraud.  In their defense Deloitte has argued that Chinese law prohibits auditors from providing such information to the SEC and yet the SEC has still permitted these companies to list their stocks on American stock exchanges.

TIPS

Although a good, diversified portfolio may well include stock from foreign companies, the rules for evaluating any company remain the same and if you are unable to evaluate a company’s financial picture due to a lack of reported information, you should avoid that stock.  People should only invest in companies that they know and understand.  If you are interested in investing in the Chinese market, you may well be better off investing in American companies that do significant business in China.