Mary Schapiro, who just stepped down as chair of the US Securities and Exchange Commission, devoted one of her last interviews in the job to complaining about China.
Specifically, Schapiro is upset that Chinese regulators have done little to help her agency investigate a string of Chinese public company frauds, according to an ABC News investigation airing today. Reuters estimated back in 2011 that these frauds had already cost the US public around $18 billion.
The Beijing government’s reaction to the efforts of the SEC and its sister accounting regulator, the Public Company Accounting Oversight Board, to inspect suspect US-listed Chinese companies’ books and records has been both aggressive and paranoid.
Beijing has insisted that the accounting records of Chinese companies are a state secret. And, perhaps to frighten the small industry of US short sellers who aim to profit from publicizing what they allege are Chinese frauds, Chinese police have been known to detain hedge fund analysts.
A key tactic short sellers targeting Chinese companies use is to find discrepancies between the firms’ US financial statements and the accounts they file with the Chinese government. Such Chinese accounts used to be freely available to the public. But the heads of two corporate investigation firms’ China practices, who are regularly hired by hedge funds, told Quartz that over the last 18 months, they have been regularly turned away by staff at offices of the State Administration of Investment and Commerce (SAIC), the branch of the Chinese government that keeps corporate records.
Schapiro has made this complaint before. In April 2011, she said in a report that China’s financial regulator had viewed her agency’s efforts to investigate US-listed Chinese companies on Chinese soil as a “possible violation of sovereignty” (pdf, p. 7). That she is still grumbling as she leaves her post shows just how fruitless her agency’s negotiations with the Chinese government have been.
The longer this discussion rumbles on, of course, the more the US public will associate Chinese companies with potential accounting fraud, making it harder for honest Chinese firms to raise money on US markets. It is no coincidence that just two Chinese companies managed an IPO in the US in 2012, with scores of others being delisted or voluntarily going private.