By Ai Peng Soo and Clement Tan
SHANGHAI/SHENZHEN, June 13 (Reuters) – For the two dozen Chinese retail investors gathered at the dimly lit public hall of a brokerage firm in Shanghai, the accounting scandals involving U.S.-listed Chinese companies are far from the hot topic of the day’s trading as they swap strategies over tea and cigarettes.
Many of the investors, mostly retirees, have not even heard about the saga over fake numbers among some Chinese firms that has shaken U.S. investors and stunned regulators there.
Even those who have read about the news in scattered media reports were more interested in China’s monetary tightening or tips on the favoured sector of the day than in concerns the companies they have invested in might be hiding similar bombshells in their books.
“I have read about it in the newspapers but I am not too worried. The government will intervene if something like that happens in our country,” said Mr. Tan, a 72-year-old retiree who was spending his morning watching share prices at the brokerage house. He declined to give his full name.
Heightened attention on the accounting at North American-listed Chinese firms came after short seller Muddy Waters accused Sino-Forest of fraud on June 3. Analysts joined the timber company in defending the stock, which has slumped more than 70 percent since the allegations.
Sino-Forest is just the latest named in a series of accusations this past year, with some charges proving accurate, leading to delistings and massive stock drops.
Mr. Tan’s indifference, shared by many of the other day traders at the brokerage, stems at least in part from the fact that investors like him have seen it all before.
China’s nascent capital markets have witnessed their share of fraud cases and other scandals in their two-decade history, so much so that retail investors — who account for around two-thirds of stock market turnover — often do not pay much attention to the fundamentals of the companies they invest in.
Instead, many trade on very short-term time horizons, based on speculation on trends in macroeconomic policy, government incentives for particular industries, and simply what is in vogue.
“It doesn’t bother me at all since I am a short-term investor and I never stay in the market for more than two or three days,” another investor in his 70s said of the U.S. fraud scandal, waving a paper fan to beat the humid summer heat. He declined to give his name.
Chinese exchanges have relatively strict financial reporting requirements, and improvements have been made over the years after some high-profile scandals, such as a case in the early 2000s in which Guangxia (Yinchuan) Industry Co was found to be fabricating earnings reports, only to be exposed by local media.
The tougher disclosure requirements on Chinese exchanges are one reason why many of the Chinese companies at the centre of the scandal in the United States were not able to list at home.
DISREGARD FOR FUNDAMENTALS
The issue for the market, however, is that investors have such a speculative approach that they do not pay enough attention to the information disclosed when making investment decisions, analysts say.
“The majority of investors in China, including fund managers, don’t really pay attention to the fundamentals. Instead, there’s a lot of trading and buying based on privileged information, bordering on insider trading,” said Ding Yuan, a professor of accounting at the China Europe International Business School.
“The key problem in China isn’t on the supply side — the financial information is there. Instead, the problem is with the degree of usage of this information.”
Stories about Chinese retail investors’ disregard of stock fundamentals are well-documented.
As recently as March, when Japan was hit by the earthquake, tsunami and nuclear crisis, Chinese investors chased up shares of salt producers following baseless rumours that iodine in salt could combat radiation sickness.
So far the stock markets in Shanghai and the even more speculative Shenzhen have responded mostly sanguinely towards the scandals in recent weeks. Like other major indices, Chinese domestic markets have been under pressure against a backdrop of broader uncertainty towards the economic outlook.
Local media have reported only sparingly on the accounting scandals, even though they have become a hot topic in some online forums, where commentators have shown little sympathy for the companies that faked their books.
However, given investors’ attitudes, many see it unlikely there would be any widespread panic even if some similar cases of accounting fraud came to light.
“China’s markets are still driven by domestic policy,” said a businessman in his 30s in downtown Shenzhen who had been investing in stocks since 2007 and refused to give his name.
“Even if I knew about the news, it probably wouldn’t affect my decisions. It’s just another reason for markets to fall, but they will rebound again. That’s the nature of markets.” (Additional reporting by Don Durfee in Beijing; Editing by Jason Subler and Lincoln Feast)
This article was originally published at Reuters.com.