Short-sellers of Chinese companies are back, and shadier than ever. In the past few weeks, two anonymous groups have trained their critical sights on Tianhe Chemicals, a Hong Kong-listed group, and Nasdaq-listed 21Vianet. Executives have tried to dispel doubts about their financial statements while railing against mysterious critics. But they haven’t yet tried the most effective riposte to those betting on a lower stock price: buying more shares.
There’s a certain irony in groups refusing to identify themselves while claiming to promote corporate transparency. And it’s easy to understand the frustration of executives forced to respond to damaging allegations from detractors armed with little more than a website and a Twitter account. Yet even if companies were able to identify the people behind the research groups, it’s hard to prove that they set out to manipulate the market. Nor is suing for defamation much of a deterrent. Few companies want to give their foes the opportunity to defend their allegations in court.
Investors’ willingness to give anonymous research groups the benefit of the doubt is also a symptom of the deep lack of trust in Chinese companies. In China, people can be imprisoned for investigating fraud as well as for perpetrating it. That helps explain why 21 Vianet has seen its $2 billion market value halve since a group called Trinity Research raised questions about the Chinese data centre operator’s accounting and past acquisitions.
Companies can respond by publishing detailed, point-by-point rebuttals, backed up by public documents, as Tianhe did on Sept. 11. Even then, however, some of the taint may linger when shares in the chemical company, which have been suspended since Sept. 2, start trading again.
A more effective response is for new or existing shareholders to buy shares. That is what Temasek, the Singaporean state investor, eventually did after short-seller Muddy Waters questioned commodity trader Olam’s accounts. Chinese advertising group Focus Media – another Muddy Waters target – responded by launching a management buyout. Tianhe has said its controlling shareholders would consider buying more shares “in the event of disorderly market trading”. Reaching into their pocket is the best way to see off anonymous assailants.