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China Minzhong saga casts spotlight on S-chips

The recent China Minzhong saga with Glaucus Research has raised concerns that other S-chip stocks may be under scrutiny as well.

SINGAPORE: Confidence in China-linked stocks on the Singapore Exchange or S-chips has taken a beating of late.
The recent China Minzhong saga with Glaucus Research has raised concerns that other S-chip stocks may be under scrutiny as well.

Although the S-chips stocks have seen a slight rebound over the week, some analysts have said the sector may not be out of the woods yet.

The sharp decline in China Minzhong shares last week seemed to have dented investor sentiment on other S-chip stocks.

China Minzhong shares fell 48 per cent to 53 Singapore cents last Monday after short seller Glaucus Research issued its 49-page report with allegations of accounting irregularities by the company.

Shares of Sino Grandness fell about 20 per cent on the news, while shares of another S-chip, Yanlord Land Group, shed about 3 per cent.

These shares fell on concerns that the S-chip sector may be fraught with poor corporate governance issues.

But there has been a slight rebound in S-chip stocks since China Minzhong issued a rebuttal against Glaucus Research.

However, on the whole, S-chips have been an oft-maligned sector, shedding about 17 per cent year-to-date.

At least one research house, CIMB, has ceased coverage of China Minzhong, and Kim Eng Research now has the stock "under review".

Analysts said this does throw the accounting practices of different jurisdictions into question.

The China Minzhong saga highlights the cultural differences of doing business in China and other regulated economies such as Singapore.

Analysts said the recent debacle has seriously dampened investor confidence and appetite for S-chips.

Daryl Liew, head of Portfolio Management at Reyl Singapore, said: "The number of S-chips that come onto the market tend to be of lower quality than what we see that are listed in Hong Kong.

"There are a number of S-chips that have already gone down. It is not difficult to raise reasonable doubt and raise a panic and cause the stock price to go down. The lesson here at the end of the day is one of corporate governance."

Still, some experts said it may be too soon to lump all bad chips in one basket.

Robson Lee, partner at Shooklin & Bok, said: "You have errant companies coming from many places, including from Singapore as well. At the end of the day, we should not be jumping on the bandwagon and pinpointing companies unfairly if they come from a particular country.

"Yes there are cultural differences but I think the Singapore regulators have put in place a whole host of measures to guide management. You have a team of independent directors in the audit committee. These are the measures that Singapore has in place to bridge cultural differences."

He added: "In China, two cardinal principles of doing business usually prevail - 'face' and 'guanxi' or personal relationships. On its own, these are the antithesis of good corporate governance. But I would say that these are not necessarily dominant factors that determine what the outcome of corporate governance practices is.

"We have a process in Singapore whereby before companies are listed, management, the audit committee, they are all interviewed by the issue managers and lawyers and external auditors to ensure that they fully understand their roles and responsibilities and the compliance requirements in Singapore. So I am pretty optimistic that this is a single episode on its own. I wouldn't read too much into it."

Despite the "bad press" surrounding S-chips, some remain attractive takeover targets by large and well-governed companies.

For instance, Indonesia-based Indofood Sukses Makmur launched a takeover bid for China Minzhong on Monday.

This has somewhat helped prop up the sagging confidence in the Chinese vegetable processor.
Shares of China Minzhong ended 0.44 per cent lower at S$1.12 on Tuesday.


PetroChina hit by US class action law suit for failing to disclose graft probe

A US law firm has filed a class-action lawsuit in an American court against PetroChina and some of its executives for failing to disclose the corruption scandal affecting the oil giant and its state-owned parent, the China National Petroleum Corporation (CNPC).

Several former executives of PetroChina and CNPC are under investigation by the central government for corruption, including Jiang Jiemin , a former head of CNPC, PetroChina and the State-owned Assets Supervision and Administration Commission (Sasac). The investigation is believed to be linked to Zhou Yongkang , former security tsar and ally of fallen leader Bo Xilai .

Pomerantz Grossman Hufford Dahlstrom & Gross filed the lawsuit in the court of the Southern District of New York on behalf of all investors who bought US securities in the Chinese firm from April 26 last year to August 27, seeking unspecified damages from PetroChina and some of its executives, said a press release issued by the law firm.

PetroChina, listed in Shanghai and Hong Kong, has American depositary receipts traded in New York.

Although class-action lawsuits are not uncommon in the US, they should be regarded as important, said Daniel Roules, a Shanghai-based partner at US law firm Squire Sanders. "The damages will be based on the number of damaged investors, but class actions are always costly for a company. Even if PetroChina prevails, the costs of fighting the case will be high."

PetroChina cannot afford to ignore this lawsuit, otherwise the plaintiffs would win a default judgment, said Roules. "It does not matter that the investors are in the US and the misconduct may have occurred in China. The plaintiffs have grounds for claiming they have been harmed as investors."

The lawsuit alleges PetroChina failed to disclose that some of its senior officials were in non-compliance with its corporate governance directives and code of ethics, and that PetroChina was subject to investigation by the Chinese authorities.

PetroChina's financial statements "were materially false and misleading" during the period of the lawsuit, said Pomerantz.

If a company paid bribes and claimed them as legitimate expenses, that would be a falsification of financial statements, likely resulting in fines, said Roules.

"Perhaps most significant is the damage to reputation. Banks and capital markets will be less willing to put their money with a company that has earned a reputation for falsifying financial statements, so PetroChina's cost of doing business will increase as a result of the undisclosed corruption," he said.

A PetroChina spokesman declined to comment on the lawsuit. "The serious violations of some individuals have nothing to do with the company's corporate governance and strategy. Getting rid of corruption will benefit the company's development."


Edward Lehman雷曼法学博士
Managing Director 董事长

LEHMAN, LEE & XU China Lawyers
Founder of LehmanBrown International Accountants

LEHMAN, LEE & XU is a top-tier Chinese law firm specializing in corporate, commercial and intellectual property matters. For further information on any issue discussed in this edition of China corporate governance News , or for all other enquiries, please e-mail us at or visit our website at

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