Opportunity to Short Selected Chinese Companies

Moody's released a report today raising concerns over some publicly traded Chinese firms. Moody's study looked at 61 non-financial Chinese companies in an attempt to identify problems such as "weakness in corporate governance, risky or opaque business models, poor quality of earnings or cash flow, concerns over auditors or financial statements, and business strategies geared towards fast growth."

 According to the report, “In recent weeks, a variety of participants in the market, including the U.S. Securities and Exchange Commission, are looking into potential problems with the quality of financial reporting from publicly listed Chinese companies”. 

One sector of concern was property companies, which were flagged more often than other non-financial companies. China's property market has been expanding at a rapid pace, raising concerns of a potential property bubble. I can't help but remember the U.S. property bubble and the many companies that failed in the subsequent collapse. During the U.S. housing boom many companies operated in an opaque, lightly regulated market. Based upon Moody's report, a similar scenario seems to be playing out in China. The scary thing is the rise in Chinese real estate prices has been greater than during the boom years in the U.S.

Identifying Chinese property companies with questionable earnings could be an excellent short opportunity even in the absence of collapsing real estate prices. I can't help but think of Countrywide Financial. Admittedly, I have not had the opportunity to look into this trade yet, but stay tuned!