Saturday 19 September 2015

Weekend Update – A Chinese Market.



“But it [the boom] could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”

Ludwig von Mises.

Last weekend we wrote: “What does the Chinese slowing economy mean for the rest of us? A bad case of economic flu seems likely, followed by a slew of next Lehman’s surfacing globally, from all the malinvestment fostered by central banksters,  QE forever, ZIRP and NIRP.”

So this weekend we follow up, with MarketWatch’s follow up on Barron’s investigation into Chinese-Cayman Islands hybrid stock Alibaba. With the Communist Party of China actively rigging China’s stock markets, I wouldn’t be an investor into Chinese stocks. All market rigging attempts eventually end badly, whether rigging the tin commodity market via the International Tin Council, and the International Tin Agreement. Sumitomo’s “Mr. Copper,” Yasuo Hamanaka rigging the copper market. Baring’s Nick Leeson wiping out Britain’s oldest bank.

Or in this case, Beijing’s Communist Party apparatchiks busily buying up Chinese stocks, especially near the close, whilst forbidding every Chinese hedge fund and corporate insider from selling. Just for good measure, the media are only allowed to write good news stories about Chinese stocks, failure to comply gets an unplanned “vacation” in a “Chinese meeting,” or worse, paraded on national TV “confessing” to the error of your ways.

Eventually, of course, other world events overwhelm the attempted rig, and the rigged market corrects back to rationality, but not before overshooting to the downside as everyone realises a ton of what was just rigged is about to come crashing back onto the market. Did the Fed wimping out just do it for Chinese stocks?

Below, MarketWatch on Alibaba. I rest my case Mi’Lud.

Can we trust Alibaba’s numbers? Auditor has never faced U.S. regulatory scrutiny

Published: Sept 15, 2015 8:00 a.m. ET

PwC Hong Kong signed only Alibaba audit, but China forbids U.S. from inspecting that firm

Barron’s spent a lot of time analyzing the Alibaba Group Holding Ltd. numbers and strongly questioning the stock’s future, even though those numbers have never been verified by an independent third party fully vetted by U.S. regulators.

The PricewaterhouseCoopers Hong Kong member firm, the one that signs Alibaba’s BABA, -0.38% audit, has never been inspected by the audit regulator in the United States, the Public Company Accounting Oversight Board. That’s because the Chinese government forbids the PCAOB from performing audit-quality inspections of the Chinese firms and their U.S.-listed company audits, whether on the mainland, in Hong Kong or in Macau.

On Sept. 12, Barron’s magazine published a story with the headline “Alibaba: Why It Could Fall 50% Further.” Alibaba Group immediately responded to the Barron’s story, objecting to its “factual inaccuracies and selective use of information” in a letter to the magazine’s editor penned by Jim Wilkinson, the company’s Senior Vice President of International Corporate Affairs.

Venture capitalist Marc Andreessen and CNBC commentator Josh Brown both tweeted on Monday that Barrons had, more or less, said Alibaba was committing accounting fraud.

Brown told MarketWatch he holds a position in Alibaba. Andreessen responded via Twitter that he has no position in Alibaba.

The Alibaba business model — an online market with mainland China headquarters, registrations in the Cayman Islands and an audit signed not by the U.S. firm nor even its mainland China office — should cause investors to pause immediately and apply a healthy dose of skepticism and caution.

Alibaba has filed quarterly reports with the Securities and Exchange Commission since its IPO last September, but only one annual report and audit opinion so far, from PricewaterhouseCoopers Hong Kong. That report, filed on June 25 for a full year of financial information as of March 31, says that “Most of our operations are conducted in the PRC (People’s Republic of China) and substantially all of our revenue is sourced from the PRC.”

Why would the Hong Kong member firm sign the audit if the headquarters and the majority of the operations and revenues are in mainland China? Maybe Alibaba thinks investors will take the numbers more seriously if the Hong Kong member firm of PwC and not the mainland China member firm audited them.
Barron’s certainly did.

The mainland China member firms of the largest global audit networks, remember, recently fought off efforts by the SEC to suspend them because they refused to turn over documents regarding investigations of fraud at Chinese companies. They dodged that bullet, for now. In February those Chinese accounting firms — separate legal entities who pay for the use of the Deloitte, EY, KPMG and PricewaterhouseCoopers brand — agreed to pay $500,000 each for their lack of cooperation in the investigations and to comply with future
SEC document requests when their clients are being investigated for fraud.

Investors should care who signs a company’s audit report. The PCAOB has proposed to require firms to disclose in the audit report the names, locations, and extent of participation (as a percentage of total audit hours) of other public accounting firms that took part in the audit. The Alibaba situation shows how important that proposal is to financial statement integrity and the integrity of the global capital markets. Under auditing standards, the audit report needs to be signed by the ”principal auditor,” the one that does the most work. Is it PricewaterhouseCoopers Hong Kong or PricewaterhouseCoopers Zhong Tian LLP on the mainland?
Paul Gillis, a PhD and CPA and a professor of practice at Peking University’s Guanghua School of Management, has written on his site China Accounting Blog that the practice of signing reports in Hong Kong to cover work done substantially on the mainland is consumer fraud, like “a Chinese shirt maker sewing ‘Made in Italy’ labels on shirts made in Wenzhou.”

----A spokeswoman for the SEC declined comment on the Barron’s story and its allegations. Spokespersons for the PCAOB, PwC Hong Kong and Alibaba did not respond to a request for comment.
More

Operator, get me the number for 911.

Ma Yun. With apologies to Homer Simpson.

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