Mystery surrounding a police investigation of China's richest man over alleged stock price manipulation has highlighted the risks to shareholders from murky disclosure rules for Chinese companies. Appliance retailer GOME Electrical Appliance Holdings' shares were suspended on Monday as local press reported that founder Huang Guangyu had been "detained" the previous week.
But it was not until Wednesday that police confirmed Huang was under investigation and on Thursday state news agency Xinhua, citing police, said the probe concerned "economic crimes". The confusion even prompted Xinhua to say the media should be kept informed.
"In the face of many rumours, related departments could only answer media questions with 'we've not yet received notification', which has indeed made people feel lost," the agency said on Wednesday. Dramatic disappearances by Chinese entrepreneurs show that a well-managed company can survive a scandal, analysts say.
The greater risk to Chinese shareholders, and increasingly, to shareholders in "red chips" listed in Hong Kong, is the practice of long-term, vaguely explained trading suspensions that can leave small investors' money tied up for months without any way to limit their losses.
"A lot of shares get caught in limbo-land and it's very frustrating for minority shareholders," said Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong. Trading in Hong Kong-listed GOME's shares was suspended on Monday, but the company has only said it is checking media reports of its chairman's detention. It cancelled a results conference the same day without giving a reason. Xinhua said on Thursday that GOME spokesman He Yangqing would make a statement at the start of next week.
"Long-time share trading suspensions are quite common in China, contrary to international practice, where trading generally resumes shortly after corporate announcements," said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in Chinese stocks.
"The Chinese practice appears to be spreading to Hong Kong-listed companies with Chinese backgrounds. This is not good for Hong Kong as a mature global equity market." Chinese regulators were aware of the problem, analysts said, while jurisdictional limits tie the Hong Kong authorities' hands.
"It's a structural problem with PRC (mainland China) listings in Hong Kong ... Most of the assets are in China and management is in China so there is very little the Hong Kong regulator can do," Allen said. In a recent case in Shanghai, fertiliser maker Yuntianhua suspended shares for nearly eight months, before announcing an asset injection by its parent on November 8.
In the meantime, the Shanghai market had lost half its value, leaving Yuntianhua's shares to drop 60 percent in the eight days after they resumed trading. Huang has not been formally arrested, nor charged with any crime. Media reports say the investigation is related to a sudden jump of more than 500 percent in the shares of SD Jintai over a seven-week period in the summer of 2007.
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