China´s economy does well on a micro-level - Jeffrey Towson

Jeffrey Towson

China´s macro economy regularly triggers off predictions of doom and gloom, but at micro level, there is still an amazing opportunity for growth, says Peking University business professor Jeffrey Towson to the Financial Times. “You can keep watching more and more movies and taking more and more vacations."

The Financial Times:

China’s economy has risen to become the world’s second-largest without the existence of entire industries, most of them in the service sector and leisure, which are taken for granted elsewhere. From private aviation to yacht-building, industries are emerging that will help offset the decline of coal, steel and other sectors emblematic of China’s “old economy”. 

Jeffrey Towson, a business professor at Peking University and a former investment executive at the Saudi Arabia-basedKingdom Holding Company, argues that it is easy to be “too pessimistic” about the Chinese economy. “Looking at macro stuff in China does that to people,” he says. “Things are much more optimistic at a micro level.” 

Mr Towson points to “unlimited demand” for everything from entertainment to healthcare, which are growing at double-digit rates and will continue to do so for the foreseeable future... 

“You can keep watching more and more movies and taking more and more vacations,” Mr Towson says. “That is different from buying a washing machine or a sofa. People don’t buy five washing machines.”

More in the Financial Times.

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Short selling campaigns against Chinese firms - Paul Gillis

+Paul Gillis 

Accountant professor Paul Gillis will teach this fall a course on short selling campaigns against Chinese firms at Peking University. At his weblog he summarizes some conclusions. After a few bad years, this highly attractive business is back again.

Paul Gillis:

There have been 145 campaigns against Chinese companies since 2009. Some companies faced multiple campaigns by different research firms. Returns are measured from the commencement of the campaign to the campaign end date, or the present if the campaign continues. I calculated the average campaign return simply by averaging individual campaign returns (i.e. my number is not weighted by market capitalization). Positive returns mean the stock price went down and the short sellers profited. 

Muddy Water’s 2010 campaign against Orient Paper is often thought to mark the commencement of the reign of the short sellers with Chinese stocks (although there were a few earlier campaigns). 2010 was an amazing year for the short-selling analysts. Each of the 18 campaigns was profitable, yielding an average return of 82% and many leading to complete wipeouts of the target. 

The big year for campaigns was 2011, with 59 attacks yielding an average return of 52%. Some of the most spectacular short campaigns, including Sino-Forest, happened that year.  But a few campaigns failed, sometimes because the company went private (Focus Media, Harbin Electric) or was able to shake off the allegations (Qihoo 360). 

By 2012, the market turned bleak for short sellers. The number of campaigns dropped to 18 and they lost an average of 36%. The year 2013 was no better, with 14 campaigns losing an average of 37%. Perhaps the low hanging fruit was gone, and perhaps the companies learned how to better defend themselves. I need to spend some time digging into the details. 

If you thought two bad years would stop the short campaigns, you would be wrong. They returned with 27 campaigns in 2014 winning an average return of 26%. Six campaigns in 2015 have already returned 13%. There has been more action in Hong Kong lately; I will address that in a later post.

More at the ChinaAccountingBlog.

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Big four cannot settle China issue - Paul Gillis

+Paul Gillis 

The US financial regulator Securities and Exchange Commission tries to reach a deal with the big four accounting firms, writes Compliance Week. But there is very little the big four can do, argues accounting professor Paul Gillis, since this is an issue between governments.

Compliance Week:

Paul Gillis, a professor Peking University and an expert on the audit regulatory environment in China, says he doesn't believe it's possible for the SEC to reach any kind of settlement with the firms. “The Big 4 do not have the ability to cut a deal,” he says. “Any deal has to be between the United States and China.” He says the next best hope for any kind of agreement is at the U.S.-China Strategic and Economic Dialogue in July in Beijing. “But tensions between the U.S. and China are high, which might make a deal more difficult,” he says.

More in Compliance Week.

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The Big Four in China - Paul Gillis

Paul Gillis

The academic book The Big Four and the Development of the Accounting Profession in China  by professor Paul Gillis of Peking University is available at his publisher or at Amazon. Paul Gillis is a thought leader on his profession in China and available as a speaker.

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US ruling hurts Chinese clients more than the Big Four - Paul Gillis

Paul Gillis

The world´s four largest auditing firms are up in arms, as their China division as the SEC rules against them. But the real victims are their Chinese clients, warns Peking University professor Paul Gillis on his accouting weblog. Not only listed firms, but all companies working with the big four.

Paul Gillis:

As much as the firms are feeling sorry for themselves, it is their clients and the investors in those clients who will be hurt if the firms are banned from practice. A ban could lead to the companies being kicked off of U.S. stock exchanges for failing to produce audited financial statements. IPOs would have to be post-poned until the bans were over. Financings would be delayed. Fortunately appeals are likely to delay this for a long time. 

The effect would not be limited to U.S. listed Chinese companies. A ban from practice before the SEC would not allow the China member firms of the Big Four to do any audit work that is used in connection with a report filed with the SEC. That would preclude the China Big Four from working with their U.S. counter-parts on big U.S. MNCs like General Motors and IBM during the ban. That would increase the risk on MNCs with China operations which is not in anyone’s best interest. 

The SEC tried to head this off. They asked the judge for a lifetime ban on the firms, but wanted it limited to engagements where the China firm does more than 50% of the audit. That idea was obviously designed to make sure the ban did not prevent the firms from working on MNCs. The judge disagreed, putting in place a six-month ban but making it a complete ban on the right to practice. That means the firms cannot work a single hour on MNC clients during the ban. 

That is a bad result, not just for the firms, but also for the capital markets. I hope the SEC commissioners change that when they review the decision. The judge said he could not find a legal justification for a partial ban; I hope the SEC commissioners are more creative.

More at Paul Gillis´accounting weblog.

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