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  • The Legal Structure Of Chinese Stock Frauds

    Every exchange-listed Chinese company that committed fraud in Hong Kong, Singapore, New York, London or Frankfurt had the same legal structure. The exchange-traded company was incorporated in the Cayman Islands, Bermuda, British Virgin Islands (BVI), Singapore, Jersey, Nevada or Delaware. These offshore entities were then used as holding companies for the China-incorporated subsidiaries. Or the exchange-traded offshore entities held other offshore companies, which in turn held the subsidiaries incorporated in China. And some of these offshore companies were reverse merged into US-listed companies incorporated in an American state.

    These legal setups provide full protection to Chinese mischief and none to foreign investors. If the Chinese are allowed to take advantage, they will, as can be witnessed by reviewing the delistings since 2001. The "China concepts stocks" delisted from Hong Kong, Singapore and the US in the last ten years had these legal setups. Thus, if an exchange-traded company has this legal setup, more likely than not, the Chinese managers are committing fraud to some extent.

    It is important to note that not every Chinese company listed in American markets is of the reverse merger category. Offshore companies are listed in American exchanges as well. To make it very clear, have a look at the following sample of US-listed Chinese companies classified according to its place of incorporation:

    Cayman Islands: BORN, CCM, CISG
    British Virgin Islands: HOLI, JST
    Nevada or Delaware: CXDC, YONG, HOGS, LIWA

    All of the Nevada- or Delaware-incorporated companies listed above "reverse merged" a company incorporated in the BVI.

    That being said, shareholders who own shares in a Chinese company trading in Hong Kong, Singapore, New York or London may not own an economic participation in the China-incorporated subsidiary because the holding company could have been stroke off its share register and replaced with the name of the Chinese manager or his newly incorporated Chinese company, which would have no relationship whatsoever with the exchange-listed holding company.

    Even if the holding company appears as the shareholder of the Chinese subsidiary, it is possible that, unbeknownst to shareholders of the publicly traded company, such shares have been placed as collateral for, say, a personal loan to the Chinese manager. In other cases, the land or fixed assets of the Chinese subsidiary may have been hypothecated by the Chinese manager in order to obtain a personal loan, or a loan for his newly incorporated Chinese company.

    To ensure that Chinese subsidiaries are owned by the holding company, their share registers at the State Administration for Industry and Commerce (NYSE:SAIC) could be checked frequently. In addition, checks on local shares, fixed assets, and land could be performed to ensure that they are mortgage free. Of course, frequent checks will help alert an investor of potential irregularities, but they won't protect him from fraud once such actions have been committed.

    By the way, it is helpful to be aware of the many indexes that track the stock price performance of Chinese companies. The most useful are:

    Hong Kong: MSCI China P Chip
    Singapore: FTSE ST China Index
    United States: Bloomberg Chinese Reverse Mergers Index

    In the United States, no index exists to track the offshore companies listed in American markets. The Bloomberg's reverse mergers index is helpful but it doesn't include the whole lot.

    If you want to learn more about Chinese stock frauds, have a look at this article.

    Aug 07 1:34 PM | Link | Comment!
  • Bosideng: A Subsidiary Of The Gao Conglomerate

    I believe the Gao family are running a low-profile embezzlement operation against the investors of Bosideng, the Hong Kong-traded holding company which was incorporated in the Cayman Islands. Although it might be in the process of becoming one, it's not your typical Chinese capital-expenditures fraud. I think it is a bit more elaborate. Mainly, it consists on two different strategies:

    1) Selling economic participations of their family businesses to Bosideng (Cayman) at a significant overprice.
    2) Using the cash of Bosideng (Cayman) to finance the expansion of the family conglomerate.

    The Gao family conglomerate owns land, factories, retail shops and maybe even hotels and other investments not related to the apparel sector. Their businesses are spread across a wide array of corporations incorporated in China, UK and offshore (Cayman, Bermuda, and others). From the Gaos point of view, Bosideng (Cayman) is just another subsidiary, from which they can take the cash they need to finance the expansion of the family conglomerate. So, whenever Bosideng goes into a lease agreement, the Gao conglomerate is the lessor. And whenever a batch of clothes are manufactured, the Gao conglomerate manufactures it and dispatches it to Bosideng.

    Have a look at the last two "acquisitions": Jiangsu Kangbo Clothing Co., Ltd. (Menswear company), and Talent Shine Limited and Sunny Bright Global Investments Limited (Womenswear companies). The total goodwill paid on those two transactions is CNY 777 million. In addition, Bosideng paid CNY 597 million for "customer relationships". Whether or not real contracts exist, the "Customer relationships" account actually represents economic participations in the Chinese subsidiaries owned by the Gao conglomerate. With such an arrangement, the Gaos never lose control over the Chinese subsidiaries that really own the factories, and yet Bosideng could be benefited somewhat.

    It is interesting to note that the Womenswear companies were owned by another "independent third party." In this case, the "independent third party" is Talent Shine International Limited, which was incorporated in the British Virgin Islands (BVI). Now, Talent Shine International Limited (BVI) was incorporated around the same time Talent Shine International Limited (Hong Kong) (朗材國際有限公司) was dissolved. I believe this was done to conceal the identities of the individuals behind Talent Shine, as it is easier to do so with a company incorporated in the BVI. Nevertheless, they left a paper trail. If you are curious about who the directors of Talent Shine International Limited (Hong Kong) were, you can find the answer at the Companies Registry in Hong Kong. Obviously, Talent Shine is yet another subsidiary of the Gao conglomerate.

    Moreover, as opposed to the previous acquisition, Bosideng issued shares to raise CNY 507 million in order to purchase the Womenswear companies. However, they supposedly had CNY 3000 million in cash at the time. Why not use it to purchase the Womenswear companies? My explanation is that the Gao conglomerate has already used that cash for its own benefit, and not for the benefit of Bosideng. It may have even been used by the Gaos to purchase the UK retailer Greenwoods Menswear, which was acquired by Harvest Fancy (Hong Kong), the "independent third party" who sold the Menswear company to Bosideng. The names of the original Greenwoods directors will sound familiar to you: Xiadong Gao, Lifang Gao, and Kin Wa Tso, who used to be a director at Bosideng Corporation (Hong Kong) before being a director at Harvest Fancy. It is highly likely that the Gao conglomerate will eventually sell Greenwoods to Bosideng for a hefty price.

    Parallelly, keen observers will notice a significant rise in bank borrowings from CNY 587 million to CNY 1740 million in spite of the cash on hand. Be wary if they say that it was done so in order to comply with the State Administration of Foreign Exchange.

    Finally, there has also been a significant increase in fixed assets. Fixed assets used to be minimal until 2008. But in the last three years, they have begun to rise at an unprecedented rate. I'm wondering whether that change marks the beginning of a classical Chinese capex fraud, or an actual transfer of assets from the Gao conglomerate to Bosideng, of course, at an overprice. As a consequence, I think that Bosideng will issue more shares in the coming months in order to raise the necessary cash that the Gao conglomerate needs.

    Aug 06 7:43 PM | Link | Comment!
  • Apple Pays $60 Million In Extortion Fees To Chinese Blackmailer

    Yang RongshanYang Rongshan, a Taiwanese chiseler, extorted 60 million dollars from Apple with the help of the Chinese state. Earlier this year, at his request, the Chinese state ordered iPad distributors to stop selling them in China and actively blocked iPad sales. Thus, Apple was intimidated into unwillingly pay the extortion fees to Yang's company, which last reported 500 million dollars in annual sales.

    China is famous for promoting embezzlement of foreigners' assets, and aiding and abetting Chinese larcenists. Not so long ago, Yang defrauded foreign investors through his Bermuda-incorporated company called Proview International Holdings, which was suspended from trading on the Hong Kong exchange after the 1 billion dollar fraud became evident. As in other Chinese stock frauds, the Chinese state will ensure that the embezzled assets permanently remain in the hands of the Chinese fraudsters, because, in China, larceny is a virtue.

    Jul 02 4:45 PM | Link | Comment!
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