In common law countries like the U.S., there is very littlepublicly available information about closely-held companies. Beyondregistering a name and address with the state which then bestowsthe right to incorporate, a private company is typically notrequired to disclose information about what it does, who owns it,or how it has performed. In civil law countries like China companies are listed on a public registry which might require moreinformation, such as a list of directors, but even then financialdisclosures are unusual. China is unusual, not only because financial information isavailable, but because you never know just what you might find incompany files. |
Financial information on private companies is collected by theState Administration of Industry and Commerce, but not everycompany has the same breadth of documents on file with SAIC. Insome cases one in five by one lawyer s estimate searchesturn up a veritable treasure trove of original documents that caninclude everything from articles of incorporation and minutes fromboard meetings to records of assets transfers and changes inshareholders. The big question surrounding the current crackdown: If othereconomies function well enough without such information beingavailable, why should China be held to a different standard? In Western countries, if something goes wrong with a deal or aninvestment or a joint venture, the parties involved can turn to afair and transparent legal system that can force the handing overof internal documents. In China, courts are seldom sympathetic toforeigners and their decisions are heavily influenced by localpolitical and economic considerations. Investors here long agolearnt that it is necessary to do extensive due diligence inadvance of any deal to avoid being stuck with a nasty surprise inthe future.
SAIC filings made a splash in capital markets late in 2010 whenshort-sellers started citing financial information contained inthem as evidence that Chinese firms listed in the U.S. were lyingto investors. SAIC figures often showed profit and revenue levelsat a mere fraction of what companies were disclosing to U.S.exchanges. Still, lawyers and investigators say there is little to suggestthat the SAIC filings are any more accurate than what s filed inthe U.S.
Analysts say Chinese companies typically keep multiplesets of books, and that the numbers they present to the governmenttypically low-ball earnings in an effort to minimize taxes. People who use SAIC data say its real value lies in helpingdetermine exactly who has an interest in a company, and whetherit s involved in related party transactions or in the words ofone investor, working out who they re getting into bed with. Andthat s of value to private equity investors, companies looking forpartners or acquisition targets in China, and even foreigncompanies wishing to do a background check on potential suppliers. Often SAIC documents have been only the first step of theinvestigation process. Until recently China has been a sieve ofprivate data with information on vehicle registration, householdresidency, phone records and even bank account details available tothose who knew who to call.
Research companies say that suchinformation has become all but impossible to access since April 20,when the Public Security Bureau launched a nationwide campaignagainst investigations companies. According to an April 28 story on the front page of the People sDaily, the Communist Party s mouthpiece, the campaign was aimed atprotecting people s privacy, and guarding them amongst otherthings against the nuisance of receiving multiple calls daily ontheir mobile phones from firms spruikingtheir services. It saidthat more than 1900 people had been detained. In recent years, with the fast development of China s economy crimes involving the abuse of citizens private information havebeen on the rise, and the illegal trade of personal information onthe internet has spread unchecked, the Public Security Bureausaid on April 24 in a statement and its Web site ( in Chinese ).
There s been a proliferation of phone fraud, extortion,kidnapping, and illegal debt collecting presenting a seriousthreat to society. Still, people in the industry say the campaign is also affectingthe use of private information to investigate companies. Why the government has decided to clamp down on the availability ofcorporate information is still an open question. Most peopleaffected by the change suspect it s been prompted by the use ofSAIC documents by short-sellers to expose fraud at Chinesecompanies, which caused the Chinese government quite someembarrassment last year. Others suspect it might be to shield thebusiness interests of government officials from prying eyes, afterpublic documents in Hong Kong were used by some media outlets to track the business connections of Bo Xilai s family.
Either way, the losers of all this are likely to be investors whoused SAIC documents to help light their way through the notoriouslymurky world of private business in China. – Dinny McMahon, with contributions from Yang Jie and YoliZhang.
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