Shaun Rein recalls in CNBC a proposed investment of US§ 50 million in a Chinese internet venture that did not exist, and was only cancelled after some solid due dilligence was done. The investor “had only been to China once, when the CEO of the target firm had wined and dined him, introduced him to some supposedly high-ranking government officials, and showed him a packed outlet.
Despite the many horror stories investors run into in China, it still amazes me how little due diligence is actually done by people investing there.
If it can almost happen to professional private equity firms, it can happen to you. Even though I have been, and continue to be, one of the biggest China bulls for over a decade and a half, I recommend a healthy dose of caution for most everyday investors before buying Chinese stocks. In fact, they might be better off investing in companies like Apple or Yum! Brands that make money in China but whose numbers you can trust.
Unfortunately, fraud is commonplace there and the investment banks, law firms, and accounting firms that should be protecting you and doing due diligence aren’t doing their jobs. Why not? Often they just want to get deals done to get their commissions and, frankly, often they are simply not up to the job. I’ve seen many non-Chinese speaking executives fly into China for for a few days to conduct due diligence and get hoodwinked.