If there’s one constant about money, it’s that someone is always wanting to take it from you. As disheartening as that statement is, the quicker investors learn it, and understand who they can and can’t trust, the more secure their financial prospects will become.
Bringing us to the latest financial fraud documentary, The China Hustle.
In the aftermath of the 2008 financial crisis a lot of investors in the US were looking to quickly recoup their losses. At the same time, many Chinese companies were looking to trade on US stock markets, but couldn’t do so directly. Some lower tier US investment banks got involved to help facilitate Chinese companies to list in the US through a backdoor using dormant companies that still had a stock market listing.
Hundreds of Chinese companies found their way onto US markets this way and some big money was being made as share prices surged. Until one US businessman, working in China, decided to investigate a Chinese paper company on behalf of his father who wanted to invest in it.
Orient Paper claimed to be doing $100 million in annual revenue. When the businessman arrived at their factory, he found a run-down operation completely incapable of doing the kind of revenues suggested, nor supporting the company’s market valuation.
It was a complete fraud and many of these Chinese backdoor listings were complete frauds.
And in a story as old as time, the only protection investors had, was the belief in their head that regulators exist to protect them – so no protection at all. The investment banks doing the backdoor listings were also putting buy recommendations on the companies and the unsophisticated individual investor, seduced by potentially high returns, were left holding the bag when the frauds were uncovered.
As one interviewee said, “you’re buying lottery tickets”. And when it comes to individual stocks, Chinese or not, that’s often the case.
In Australia 26 Chinese based companies currently trade on the ASX, only 5 are currently trading above their initial listing price. The ASX has rejected another 21 Chinese companies from listing on the ASX over the past two years.
The China Hustle is available on Netflix.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
