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 (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.

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.

The China Illusion Stops You From Recognizing Fraudulent Patterns At Chinese Companies

Asian Citrus Holdings claims to be doing well. And you believe they are? They are not doing well. They claim to have CNY 975 million in cash by June 2010. However, by December 2010, Wang Chow Tong along with his son Hung Wai Tong saw the need to raise even more cash by issuing even more shares. The proceeds from such issuance netted CNY 1,284 million. Now he claims to have CNY 2,232 million in cash.

Do you really think that a business that generates CNY 600 million every year would need even more cash from investors? Do you really think that a business that generates so much cash every year would need even more money than the cash already generated by the business itself?

Furthermore, Asian Citrus was incorporated in Bermuda. You will have no legal protection when it delists. Do you think a judge in a Caribbean island can enforce a judgement in China? Not even a judge in Delaware or Nevada will be able to accomplish such a feat, which is why investors of Chinese reverse mergers will never see their money back. Check what is happening at the delisted Chinese frauds. It is a never-ending nightmare for the Americans and Europeans who trusted the Chinese goons at the helm of the companies they invested in.

Moreover, their securities issuances, cash balances, fixed investments, financial statements, financial ratios, dividend payouts follow the same patterns found at other fraudulent Chinese companies. Asian Citrus is doing what other Chinese frauds did before. Check them out and compare them! They are copycats.

Stay away from Chinese companies! No one will protect you if you don't do so yourself. The Chinese government is not going to stop the fraudsters because they are in cahoots with them. Check the Chinese court rulings in the past years! Their abuses are blatant, and they are real.

Stop having a romantic perception of reality. These people are not your friends and are not trustworthy. They want to harm you by taking your money to use it for their own benefit. They have no integrity. They were raised with different values than ours. They are, in two words, your enemies. And they are going to be fully protected by the Chinese state against your fair claims. Check out the other cases of Chinese frauds!

The money trails being discovered by bankruptcy trustees show that the Chinese have been using the cash in lots of things, except the business itself. They have discovered that the former CEOs were really using the raised money (of the company) to build mansions and hotels and buy land across China and elsewhere. It is even possible that they are the owners of the house next door to yours!

Don't be so keen to jump into an investment just because you hear pompous phrases such as "China is growing at 9%" or "we're a leader in the world's fastest growing industry." They are nothing more than propaganda which keeps getting repeated over and over by the Chinese promoting their companies and by the mainstream media. Where were the headlines saying "China's money supply growing at 30%"?

If you choose to believe them, and they embezzle you, don't blame them, because now there are more stories than last year that serve as warnings for everyone investing in Chinese companies. You just have to be curious enough to look for those stories and read them with an open mind.

Do You Feel Alone? An Anthropological Explanation To Your Feeling Of Loneliness

Your emotions developed during the paleolithic period. Before the neolithic revolution, which gave rise to farming villages, people used to live in communities of about 150 individuals. But they were not communities of unrelated individuals, they were all family. Pre-neolithic families were composed of 150 individuals, who collaborated with each other to insure the survival of the community. So, throughout his life, a pre-neolithic individual lived together with 150 other individuals. Throughout his life, an individual lived together with the same 150 individuals. Not only were they related, they all did something for each other. They all emotionally invested in each other by way of conversations and collaborative actions. Because each individual had a very significant emotional investment in the other members of the community, the consanguineal bonds were very strong.

For over 150,000 years, 150-member communities existed. But that began to change during the neolithic period, when 400-member farming villages appeared. The rise of farming villages modified the social structure of those early families. Several early families agglomerated in a single community but spread over a larger area. In addition, living quarters compartmentalised those early families. So, a member of the village didn't interact with the same individuals on a daily basis as was the case when he was a member of a pre-neolithic community. The frequency of interactions with the same individuals was reduced in order to increase the social interactions with the other members of the village. And, due to the new social structure, bartering took precedence over collaboration. Therefore, an individual's emotional investment in the other members of the community was significantly reduced.

Nowadays, related individuals are spread over enormous distances. So they don't see each other on a daily basis. They don't talk to each other on a daily basis. They don't even interact between each other by way of bartering. Due to the current social structure, they don't need to collaborate with each other in order to survive, although if they were to collaborate, consanguinial groups could increase their chances of survival. In the current social environment, the emotional investment between related individuals is almost nil.