China corporate scandals scaring investors

China’s private enterprises under President Xi Jinping appear to be holding the short end of the stick.
The government’s earnest deleveraging campaign has hit the sector disproportionately hard, and a never-ending trade war with the US has hurt manufacturing, the core of China’s entrepreneurial spirit.
That’s only part of the story. Private businesses aren’t merely innocent lambs waiting on Beijing’s chopping board for slaughter. Waves of corporate scandals this year – escalating in their unsavory nature – are scaring investors.
Future Land Development Holdings Ltd. has just dealt the latest blow. Its billionaire chairman Wang Zhenhua, the 37th richest man in China, is being held in criminal custody in Shanghai for “personal reasons,” the company disclosed in a filing. The police said they had detained two individuals for suspected molestation of a minor. Damage to listed entities controlled by Wang was immediate and furious. His Hong Kong-listed Future Land dropped 15 percent at the open, adding to a 24 percent slump a day earlier; Future Land’s dollar bonds sank to a record low.
We’ve been smacked by roaring trains of nonsense this year. In April, drugmaker Kangmei Pharmaceutical Co. said that it over- stated cash holdings by $4.4 billion, due to an accounting “error.” Kangde Xin Composite Material Group Co. didn’t skip a beat, telling us its auditor could find no trace of a 12.2 billion yuan ($1.8 billion) bank deposit. “Qualitative factors are playing an increasing role” when assessing Chinese enterprises, S&P Global Ratings wrote in June. Put more bluntly: Firms may look great on paper, but the cash you see on their balance sheets may not even be there.
Then there’s Shandong Buchang Pharmaceutical Co. In May, we found out that the drugmaker’s chairman Zhao Tao paid $6.5 million in bribes to get his daughter into Stanford University, which emerged amid a sweeping college-admissions fraud investigation in the US Within weeks, the company said it had received questions from the Shanghai stock exchange about its lofty sales expense ratio, which at 59 percent is higher than the industry average.
And yet each of these firms were once stock-market darlings. Looking only at the numbers, what’s not to like about Future Land? In the first five months this year, contract sales grew 38 percent from a year earlier, much faster than its peers. Seazen Holdings Co., Future Land’s A-share affiliate, soared 80 percent
this year before chairman Wang’s trouble hit. Kangmei’s shares rose to a record high in 2018, even while China’s stock market was in solid bear territory.
A loss of investor confidence is the last thing private enterprises need as the economy stutters. With ban-ks reluctant to lend, stock and bond offerings remain their key funding channels.
No doubt, state affiliates have had their share of corporate-governance scandals. The former chairman of Kweichow Moutai Co., a well-loved stock in China, is now facing a corruption trial. Yet the government, leery of social unrest, has proven it’s willing to step in when things go pear-shaped. Who will come rescue the minority shareh- olders when private businesses run into trouble?
It’s understandable that risk aversion would surface when an economy hits a rough patch. But investors will naturally flee to the haven of state-owned enterprises if private businesses give them reason. The sector may be giving Beijing what it ultimately wants.

—Bloomberg

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.