Tuesday, August 23, 2011

China's Auditors Flat On Their Backs

My regular readers know that I've been long FXI for quite some time as a long-term bet on China's growth.  That country is still going through the growing pains of an emerging market.  Chinese regulators have good reason to reassure American regulators that they can police their equity markets.  You see, fraud is rampant in China's stock market and knowledgeable non-Chinese investors are getting spooked. 

Some hedge funds have picked up the dropped regulatory ball by warning investors away from questionable Chinese companies.  I hate to admit it, but some hedge funds perform a valuable public service once in a while.  Chinese regulators have extra incentive do their jobs if only to fight the increasing D&O liability resulting from public disclosures of Chinese reverse merger abuse

I'm all in favor of more discipline in Chinese capital markets.  More scandals will scare away the liquidity China needs to make its domestic manufacturers attractive to foreign partners.  Remember that China's rare earth metal strategy is designed to attract value-added manufacturing to China's shores.  That goal will be increasingly difficult to reach if Chinese regulators don't work hard to reassure foreign investors. 

Full disclosure:  Long FXI with covered calls.