China Remains Uninvestable

I hesitated to write this post because my last post on China led to personal attacks, but I have decided that it is wrong to allow that to influence me.

Yet another US listed Chinese company appears to be a fraud. Shares in Longtop Financial have been halted for two days now. What makes this different is that they were brought public by Goldman Sachs and had some of the smartest hedge funds as major shareholders. Billions of dollars will be lost as a result of these Chinese frauds but it is manageable. The real risk is that this halts foreign investment in Chinese companies.

Chinese banks have market caps in the hundreds of billions of dollars. In free markets banks tend to do poorly so one can imagine what happens when loans are  a result of political influence, as they often are in China. These banks show profits but if these profits come into question capital markets can become shut down to these banks.

It is likely that the recent frauds in China will halt the flood of Chinese companies listed in the US. The bigger risk is that investors start to question the validity of Hong Kong listed Chinese companies, which might lead to more serious issues. I continue to believe that Chinese stocks are uninvestable.

 

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