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Commentary: U.S. firms poison reputations of China start-ups for profit


08:22, September 06, 2012

Chinese entrepreneurs' moves to strike back at U.S. short-sellers have revealed a malicious act: turning a profit at the cost of the reputations and destinies of China's start-up businesses.

According to a group of 61 Chinese entrepreneurs led by Kai-Fu Lee, former head of Google China, Citron Research and other similar companies have issued negative reports about Chinese companies -- some of which have few problems or even no problems at all -- so they could make a profit by short-selling the companies' stocks.

The latest victim is Qihoo 360, a promising anti-virus software and Internet service provider. Citron has issued reports full of inaccurate analyses of the company and the Chinese Internet market, according to Lee.

Lee said Citron lacks a basic understanding of the Chinese Internet and search engine market, distorts data and "compares apples to oranges." Citron has said it would be happy to defend itself in a court of law.

Lee has written four open letters to Citron, with convincing technical details in the eyes of Chinese IT industry insiders.

In fact, the "blame China" game has been played quite often in contemporary U.S. society. From the presidential campaign to capital markets, painting an ugly face on China helps politicians win votes and helps short-sellers reap fortunes.

However, when basic facts are disregarded, such moves will prove shameful, at best.

To be honest, a small number of Chinese companies have falsified data and reports to woo investors in the U.S. stock market. However, they have paid for their mistakes, as many withdrew from the market last year or saw their share prices plunge.

But that is not the whole picture, as a majority of companies comply with laws and rules.

Citron and other short-sellers have taken aim at growing Chinese businesses, knowing they may not be as familiar to U.S. investors as some big-name companies. They know that due to information asymmetry investors can hardly verify the facts provided in their reports, given the geographical distance and lack of publicity about newer companies.

Industry heavyweights have never been the targets of short-sellers because it is more difficult to smear them. But small businesses have not been so lucky.

In the eyes of many Chinese entrepreneurs, the New York Stock Exchange is an ideal place to go public due to its mature rules and infrastructure. NASDAQ is seen as an incubator for start-up businesses and is admired by both Chinese bosses and investors.

But unjustified attacks on Chinese companies based on unreliable and ludicrous reports to potential investors are likely to shift the opinions of these entrepreneurs.

With the U.S. economy floundering for so long, the United States cannot afford to have a capital market that attracts little interest or participation from Chinese companies.

Therefore, the United States Securities and Exchange Commission needs to seriously investigate the short sellers and treat Chinese companies fairly and honestly for the sake of the U.S. stock market's own prosperity.

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