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Commentary: Short sellers preying on firms

By Mo Nong  (China Daily)

08:20, September 10, 2012

Citron Research's investigative report on Qihoo has created a storm among many Chinese who have hit back at Citron. Citron is a United States-based investment newsletter run by short sellers and Qihoo a Chinese browser company listed in the US.

Led by former president of Google China Kai-Fu Lee, 61 veteran Chinese investors and executives sent a joint protest letter to Citron on Sept 4, accusing short sellers represented by Citron of spreading disinformation to malign China-based companies. Their anger is totally justified, because in the past, some short sellers made up stories and then tried to defend their contentions with more fabrications feigning to bring order to the investment market.

This time, Citron has exploited US investors' lack of understanding of Chinese companies and their fear of loss.

Short selling is a common practice in mature capital markets and acts as market detergent. It is supposed to be an effective self-disciplined mechanism to counterbalance fraud. But what happens if the detergent itself causes pollution?

Short sellers are no different from the companies they investigate, because their motive is also to make profit. Their investigations do expose the frauds committed by other companies. But how do we expose the wrongdoings of a short seller, the self-appointed watchdog of the market?

Short sellers' reports are loaded with "explicit facts" to warn shareholders, and thus make money from investors' fear of losing money.

That an increasing number of Chinese companies are being listed abroad is good for foreign investors who see them as an easy way to tap the profits from the fast growing Chinese economy.

Short sellers will certainly not let such a chance slip by. Some of them exhaust every possibility to find a fault with Chinese companies new to the overseas market. They use Westerners' unfamiliarity with China and the stereotype image of Chinese companies painted by some Western media to manipulate market sentiments.

Some Chinese companies not familiar with the rules of the US market get rattled when attacked by short sellers, which are experienced in choosing the most vulnerable yet juicy targets to extract maximum benefit.

Citron has got more than 20 Chinese companies into trouble in the past six years. The shares of over half of those companies plunged more than 80 percent, forcing seven of them to withdraw from the market.

The problem is short sellers pocket fat profits even if their findings prove to be wrong while a legitimate and clean company is left to bleed, sometimes to death.

Everybody knows that their research could also be misleading or wrong. For example, US-based short seller Muddy Waters targeted China's Focus Media Holdings less than a year ago. After Muddy Waters released its findings, which accused Focus Media of giving false information and warned investors to dump its shares, the company's stocks dropped 39 percent.

But now the advertising company's shares are trading higher and Americans are grabbing them.

Was Muddy Waters made to pay for its misdeed? No. Instead, it has made huge profits by muddying the waters for Focus Media.

In this sense, the 61 Chinese entrepreneurs and investors have not only responded aptly to Citron's motivated short selling against Chinese companies, but also reminded Chinese companies to build their learning curve fast to fit into the global market and know how to protect themselves.

China has been the most robust economy in the world for a long time, making it inevitable for its companies to develop and venture into the wide world. But the Chinese companies and the outside world need to know each other better.

Unlike their Western counterparts, Chinese companies have to overcome the entrenched bias of short sellers such as Citron and Muddy Waters, as well as meet the challenges of technology, management and operation.

Only the most competitive Chinese companies will survive the fierce competition of the world market.

But one thing is for certain, "China-bashing" short sellers will see more Chinese companies being listed abroad. If they cannot live with that fact, they can choose the other option.

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