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Fitch Expects More China Corporate Fraud Probes

July 18, 2011 (Associated Press) HONG KONG - Chinese companies will continue to be hit by corporate fraud accusations and investigations as the country struggles to improve corporate governance standards, Fitch Ratings said on Monday.

The credit rating agency said that Chinese companies have an above average risk of facing fraud allegations, though not all will be legitimate.

Fitch said last week it was reviewing the 35 Chinese companies that it assigns credit ratings to after a spate of allegations of corporate fraud at other China companies.

The report highlights recent worries over accounting irregularities at Chinese companies that were sparked by claims of fraud at some that are listed in the U.S.

U.S. and Chinese finance officials met last week to try to resolve differences over how to oversee the auditing of U.S.-listed Chinese companies. Possible accounting problems at such companies have overshadowed fundraising efforts both in the U.S. and in China.

Short-sellers have been targeting some U.S.-traded Chinese companies, driving their share prices sharply lower amid doubts about the accuracy of financial statements filed with regulators.

In some cases, the companies have fought back, complaining that the accusations of accounting fraud or other problems were unfounded. But in others, regulators have suspended or delisted the companies or started investigations.

Also, last week, Moody's released a report that issued "red flags" to Chinese companies based on their governance or accounting risks.

"Fitch does not expect the flow of accusation and investigations to slow down in the near term, particularly if short-selling is involved," the report said. Short-sellers profit by borrowing stock to sell and then buying it back when the price drops so they can return it to the lender and pocket the difference.

"Some of the accusations will be legitimate, some will be erroneous; many will be a mixture. All will have the potential to present liquidity problems for an individual issuer and its closest peers," the report said.

Such accusations are "part of a long road to stronger market governance already taken by Latin America," it said.

Fitch said its ratings of Chinese companies are at the right level and account for possible problems of transparency, concentrated ownership and accounting standards. <

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