Shares in Chinese forestry group Sino Forest (SF) have fallen by more than 90% on the Toronto market since 2 June, when short seller Carson Block alleged that SF overstated its assets and routed money through a murky web of intermediaries to defraud investors. The company has established an independent committee to look into the matter, with a report expected in three months. This week, billionaire hedge fund manager John Paulson, previously SF's top shareholder, ditched his stake.
A two-week investigation by Mark MacKinnon and Andy Hoffman of Canada's Globe and Mail suggested that SF "substantially overstated the value and size of its forestry holdings". SF said in its first-quarter report for 2011 that due to a particular agreement it owns over 200,000 hectares in China's Yunnan province. But according to the company on the other end of that deal, the actual figure is far smaller around 14,000.
SF is also "either unable or unwilling to identify the trading partners at the heart of its business", said Dan McCrum in the FT. It's easy to see why Hugh Humfrey of Timberland Investment Resources Europe has always deemed Chinese forestry investments too risky: "we're [worried] about the legal and regulation aspect".
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
That evidently applies to plenty of other Chinese companies listed in North America. Chinese stocks on the Toronto exchange have fallen by 30% from their end of April level. In the past six months accounting discrepancies have emerged at 25 New York-listed Chinese firms. They "need to make themselves less muddy and more intelligible", said the Globe and Mail. A good start, added Peter Stein in The Wall Street Journal, would be to allow the US accounting regulator to inspect the work of Chinese accountants, thus facilitating a much closer look at Chinese firms' books. Meanwhile, investors need to keep in mind that poor access to information "comes with the emerging-markets territory".
Latest Videos FromMoneyWeek
TRE: C$ 2.38; 12m change -86%
