My lesson with Chinese stocks

I don't know how many of you have noticed the report that the famed hedge fund manager, John Paulson, has lost a big trunk of money recently, due to a 60% haircut of one of its holdings, Sino-Forest. This is a Chinese company claimed to have inflated the value of its timber holdings with fraudulent data. I also got a hit recently for a Chinese stock I held, CCME. It was doing fine initially when I bought it and then suddenly the stock was frozen for trading for a few months. When it came back, its share plummeted sharply. I lost a few thousands. Not a big deal in terms of the amount but it does serve a good warning for betting on Chinese stocks.

 

About 3-4 years ago, my friend urged me to invest in Chinese stocks. I was not moved as I just did not feel comfortable with them due to too many unknowns involved. Basically I was not sure about their accounting numbers as reported. Also gambling behaviors seemed to be the main force behind the movements in Chinese stocks. Of course, I missed the opportunity of earning some good money by not participating at all in the Chinese stock market. In the past few years, more and more Chinese companies have come to the North America and are listed in the US or Canadian market. I thought it was a good time now to invest in them, given the monitoring system is stringent here for financial reporting. I started with FXI, an ETF for 25 largest Chinese companies. Actually it has been doing quite well, even until now. The problems started with individual stocks, especially those young but growing companies. For CCME, currently there are quite a few class lawsuits for it due to a claim of false accounting. This is a big headache for any company when it is sued by such a claim. Regardless of whether it is truly involved in such an illegal conduct or not, the damage has already been done for individual investors. I had another position, CMED, which was doing quite well actually till a week ago. It was my greed that I did not give it up earlier to simply take my profits. I still hoped that this one could probably survive without a big problem. Yesterday it seemed very clear it was my illusion to hope so. I got out with a small profit (fortunately). Today its price plunged and it would have been a big loss for me if I still held it.

 

My lesson? It is still a gamble to invest in Chinese stocks no matter how great they look. They are still vulnerable to accounting problems. If you like Chinese stocks, try ETF for a basket of stocks instead of individual stocks. Of course, if you want to gamble with your money, it is another story and good luck with you!