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Singapore takes on China over a surfeit of lemons

LiveMint logoLiveMint 03-04-2017 Andy Mukherjee

Singapore: After seeing investors in Singapore duped for years by misbehaving bosses, the city’s stock exchange is taking its fight for justice to mainland China, an exemplar of egregious corporate behaviour in the post-Enron world.

Singapore Exchange Ltd said last week that its lawyers in the People’s Republic filed complaints with the authorities against Wu Xinhua, executive chairman and CEO of China Fibretech Ltd, in relation to “several alleged offenses under the Chinese Penal Code”. The company, based in Shishi, Fujian province, had an initial public offering in Singapore in June 2008. By the time the stock stopped trading in November 2015, as much as 90% of the market value of the fabric dyer had been wiped out.

Singapore’s Business Times says this is the first time SGX has sought legal recourse on the mainland against a Chinese boss. Although the exact allegations against Wu aren’t known, the only independent director of China Fibretech informed SGX in February that he couldn’t confirm the validity of compensation payments to customers totaling 470 million yuan ($68 million). Nor could he verify if the company’s China bank account, used to settle the claims, had the cash in the first place.

Considering the wealth destruction caused by many so-called “S-chips”, as Chinese companies listed in Singapore are known, the SGX move deserves applause.

Tan Boon Gin, the exchange’s chief regulatory officer, is trying to shore up the bourse’s reputation. A confidence-busting penny stocks crash in 2013, a spate of delistings, and prolonged trading halts—as many as 23 stocks hadn’t changed hands for more than 12 months at the end of October, up from 20 in April—have all taken a toll.

SGX’s own shares are practically unchanged in US dollar terms from five years ago, compared with a 50% jump in rival Hong Kong Exchanges & Clearing Ltd.

What kind of cooperation can SGX expect? Tan’s previous job as the director of the island’s commercial affairs department may offer a clue. It took three years, but with the help of Chinese authorities and regulators he did manage to force a former CEO of Singapore-listed China Sky Chemical Fibre Co. to agree to a civil settlement in which the executive offered to surrender 10% of his shareholding and pay S$2.5 million ($1.8 million) in fines to the city for making misleading disclosures. (Incidentally, China Sky is also from Fujian, and makes nylon fibres.)

All that regulatory zeal did little for the shareholders, though. The stock was quoted below 3 Singapore cents when it stopped trading in August 2016. In March, the China Sky board asked the SGX for more time to hold its annual investors’ meeting, as the company had not been able to “receive cooperation from the management in China to prepare the financial statements despite several attempts.”

SGX is hardly alone in battling the scourge of lemons. In 2011 and 2012, more than 100 Chinese companies were delisted or suspended from trading on the New York Stock Exchange because of fraud and accounting scandals, destroying $40 billion in value, according to McKinsey & Co. Canada saw the implosion of Sino-Forest Corp., which lost more than two-thirds of its value in two days. And on 24 March, Hong Kong-traded shares of China Huishan Dairy Holdings Co. plunged 86%.

Still, it’s a glass half full. Two years ago, the US Securities and Exchange Commission’s long-pending demand to have access to audit working papers in China was resolved.

It appears the Singapore Exchange is seeking action after receiving assurances that its request won’t be snubbed. That would be a good thing, if true. Rogue corporate bosses can’t just be a problem for the rest of the world. The reputation of capitalism with Chinese characteristics is at stake, too. Bloomberg

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