IFR Asia 2011 Roll of Honour

The theme of Asian decoupling is as old as the hills. For years, economists and analysts have argued over whether or not Asia is a sufficiently powerful and independent economic bloc to be able to come through the macro shocks relatively unscathed. It is always hoped for, but never quite achieved. With Europe in crisis and the US flirting with recession and unresolved debt, the question is being asked again. The simple truth is that, no matter how much more robust Asian economies look than those in the west, regardless of how much better their fiscal positions and demographics, capital continues to fly from these places whenever there are global (or western) worries. Illogical though it may be, Asian capital markets remain a risk-on bet. “We saw trickles in September, but the risk is we may start to see serious net capital outflows from Asia, which can be very destabilising,” said Rob Subbaraman, Nomura’s chief Asia economist. A look at capital flows over the last five years is illuminating. According to Subbaraman, in the 10 quarters before the global financial crisis from the first quarter of 2006 to the second of 2008, Asia ex-Japan attracted US$265bn of net capital inflows – a broad measure, including net portfolio debt and equity, FDI, international bank lending and balance of payments. In the following two quarters, in the eye of the credit crisis, US$118bn departed. “A reasonable chunk left,” he said. “However, what’s interesting is that in the next 10 quarters, from the first quarter of 2009 to the second quarter of 2011, net capital inflows totalled US$684bn.” “We saw trickles in September, but the risk is we may start to see serious net capital outflows from Asia, which can be very destabilising.” That vast increase has been down to Asia’s better fundamentals relative to the rest of the world, the higher interest rates available, and the easing policies in advanced economies that pushed capital towards Asia. Still, should we expect, as happened last time, for half of it to leave again when things turn sour? “There is a lot of room for foreign capital to leave Asia if we start to move towards anything starting to resemble the global financial crisis,” Subbaraman said. This is a more alarming prospect in some markets than others. Indonesia, in particular, has been watching closely for signs of capital flight, since, at its peak, foreigners accounted for 35% of all rupiah government bonds, with a similarly high representation in the stock market. “We have the capacity to withstand reversals,” said Rahmat Waluyanto, in the debt management office of Indonesia’s Ministry of Finance. “We have relatively large forex reserves, a widening domestic investor base, and a bond stabilisation framework.” However, money is leaving. The rupiah, having gained more than 5% against the US dollar in the first eight months of 2011, has slid by more than 6% since the start of September as overseas investors sold stocks and bonds. Foreign ownership of government bonds fell 1.1% in a single week in late November. Indonesia is a market darling: a domestic consumption story, a model new democracy, a fiscally sound nation and one capable of borrowing US$1bn of seven-year money at just 4% in November at a time when Italy was paying almost 7% on its own debt. A move up to investment-grade status within the next six months is considered a formality. However, none of that is enough to stop foreign capital leaving when there are difficulties in Europe and the US. “The Global Financial Crisis Part II is spreading to Asia a little faster than we had anticipated,” said John Woods, Citi Private Bank’s chief investment officer for Asia Pacific. Speaking on November 22, he noted that every currency and every equity market in Asia had declined month to date, with India, Australia, Korea and Taiwan hardest hit. According to Woods, this is partly a function of weak levels of risk appetite, and partly capital outflows as continental European banks reduce their

First-mover advantage may seem a strange concept when it comes to crisis management. Yet Citigroup, having begun its own painful restructuring four years ago, was perfectly placed to withstand the continued volatility that dogged Asian deal-making in the past 12 months. No longer on “life support”, as insiders put it, Citigroup this year showed off the full power of its universal banking model with an impressive array of deals across the region, helping its clients gain access to capital regardless of market conditions. Citigroup prides itself on its universal banking model, but that no longer means the bank is trying to be all things to all people – or in all places. It has sharpened its focus since the heady days of the credit bubble in the mid-2000s, concentrating on the relationships that matter rather than spreading itself, and its balance sheet, too thinly. That targeted approach paid dividends this year. Citigroup has bounced back in debt capital markets, again threatening the top of the league tables as one of the biggest bookrunners of international bond sales in dollars, euros and yen across Asia Pacific. It is again a fierce competitor in syndicated loan markets, where its willingness to use its balance sheet to underwrite key deals testified to its ability to support its clients when it mattered most. In a difficult year for Asian equities, Citigroup completed 12 Chinese IPOs and built a pipeline to match that of any of its peers. “Five years ago, we were trying to be everything to everyone. We focused our target markets and we made sure we’re focusing on our key clients in those markets, across the corporate bank and the investment bank. It’s that relentless focus that is delivering results,” said Farhan Faruqui, head of global banking for Asia Pacific. “This combined platform is a very powerful weapon, if you aim it in the right direction.” Citigroup remains a formidable institution. After trimming its global books by close to half a trillion dollars, it still boasts a balance sheet of US$1.9trn and employs close to 250,000 people. The bank’s performance over the past 12 months proves that it has lost none of its firepower in Asia, having remained committed to the needs of its global client base rather than allowing problems at home to distract it from the fast-growing region. “Citi Asia was profitable throughout the entire financial crisis. In the last three years, we’ve generated US$45bn in revenues and US$15bn in net income. So, it is a very big platform. A lot of people didn’t really appreciate that while the issues in the US were dominating the headlines,” said Stephen Bird, chief executive for Asia Pacific at Citigroup in Hong Kong. “Through our global clients, we have access to information flows. So, we know when capital requirements are coming up. We needed to have the right investment banking platform to tap those opportunities, and this year we have been able to demonstrate that we now have that in place.” People power Its ability to attract – and retain – top talent is a telling sign of just how far the bank has come in a short space of time. Whereas Citigroup was a “revolving door” three years ago, it demonstrated its renewed pulling power over the last 12 months with a number of senior hires from its rivals. In recent months, it has lured Taiwan specialist Gary Kuo, a former Morgan Stanley rainmaker, from Barclays Capital, Australian resources banker Russell Keating from Goldman Sachs, as well as Roger Zhu, a veteran Chinese investment banker, from CICC. They join earlier senior hires, including Tony Osmond from Goldman in Australia and Colin Banfield from Nomura. “The crisis for Citi started in the summer of 2007, and the bailouts kept us in the headlines and clouded people’s perception. In reality, this platform continued to make money,” said Bird. “That negative connotation has gone. The people we’ve hired in the last 15 months is the best influx of talent we’ve had in global banking at any time i

As 2011 draws to a close with European deleveraging and global job cuts high on the agenda, it is easy to overlook the enormous achievements made across the Asian capital markets over the past 12 months. Asian investments are now as important a part of any global portfolio as they have ever been, confirming the global shift of capital from West to East is no short-term blip. Even in jittery markets, Asian sovereigns were able to capitalise on that trend to raise funding at far lower rates than many of their far higher-rated European peers could achieve. Global issuers, from an Italian fashion house to a US luggage maker, turned to Hong Kong – rather than New York or London – to list shares closer to their key growth markets, reflecting the growing clout of both Asian investors and Asian consumers. The rise of the Asian consumer was the theme behind the most popular deals of the year in Asia’s equity capital markets, such as Sun Art Retail’s bumper Hong Kong IPO. New products emerged, too. Top regional conglomerates, including Hutchison Whampoa and PCCW, turned to business trusts to unlock value from their stable cash flows, taking the already popular real estate trust model to the next level. The continued internationalisation of the renminbi triggered some landmark deals in Hong Kong, where Cheung Kong (Holdings) completed the world’s first overseas IPO in the currency, and ICBC Asia broke new ground with a Basel III-compliant subordinated bond – a first in Asia. Cheung Kong, ICTSI, Shui On Land, China Resources Power and others added new depth to the corporate hybrid market, responding to investors’ demands for higher yields from top-tier credits. Asia’s high-yield bond market grew leaps and bounds in the first five months of the year, broadening far beyond the Chinese property sector to become a funding alternative for all manner of high-growth companies. Although the sell-off of the summer hit hard, it can only be a matter of time before that market comes roaring back. Many institutions exceeded expectations in a difficult year. ANZ emerged as a genuine contender across Asia’s loan markets, swelling its presence outside its traditional home markets. HSBC’s absolute dominance of the region’s bond markets, in both domestic and international currencies, showed it had finally begun to use its enormous local platform to its full potential. Goldman Sachs’ continued leadership in Asia’s equity capital markets deserves praise, especially in a challenging year for primary share sales. The industry has much to be proud of, but it was the resurgent Citigroup that really stood out, building its franchise and boosting its market share at a time when the turmoil elsewhere distracted other institutions. The second half of 2011 has been a tough period for Asia’s capital markets. Yet, the final two months of the year have underlined the region’s resilience with a number of successful deals coming to market. Losing sight of those achievements would be a mistake.

Against an uncertain backdrop, National Australia Bank stood out in the last 12 months in a competitive market. The bank’s 17 lead mandates covered a wide range of transactions from corporate loans to project financings and leveraged buyouts. Despite intense competition, it expanded its market share and registered the biggest market-share gain of any bank on a year-on-year basis. Of NAB’s 17 mandates, an impressive 10 were on a sole basis, including loans for real-estate developer Australand Property Group, department store operator Myer Holdings and internet search firm SEEK. The bank’s willingness to underwrite deals was a big factor in its success. NAB underwrote eight loans, including SEEK’s A$340m (US$335m) facility on a sole basis. Part of the loan was used to finance SEEK’s acquisition of an online employment company in Asia. NAB jointly underwrote a A$1.1bn acquisition loan to fund Origin Energy’s A$3.25bn acquisition of energy retail businesses from the New South Wales Government. The bank also financed TRUenergy’s acquisition of another set of energy assets from the New South Wales authorities. NAB has a stellar base of blue-chip corporate clients and can boast the likes of supermarket giant Woolworths, hospital operator Ramsay Health Care and property firm Lend Lease among them. “We have targeted the top 200 ASX corporations,” said Christine Yates, a managing director and NAB’s head of debt markets origination. Beyond its impressive corporate relationships, the bank also led transactions across a diverse range of sectors, such as utilities, infrastructure, financial institutions, manufacturing, health, retail and real estate. Australia’s leveraged loan scene has predominantly been a club market since the financial crisis as banks shied away from taking on syndication risk and private-equity sponsors baulked at the high costs involved. Bucking the trend, NAB clinched an underwriting and bookrunning role for the A$580m loan to back Bain Capital’s buyout of MYOB. This was a rare syndicated leveraged loan and highlighted the bank’s willingness to assume underwriting risk in a risk-averse market. NAB also boasts an impressive project finance book. It was one of three underwriters on the A$745m project loan for Plenary Living, which won a tender to develop accommodation for members of the Australian Defence Force. The loan was the first Australian social public-private partnership to be underwritten since the global financial crisis. NAB was also one of the leads on the A$2.5bn seven-year project loan to redevelop the Royal Adelaide Hospital, the largest PPP deal in Australia in 2011. In addition to greenfield project loans, NAB was one of the key lenders on the A$1.1bn project financing to back Global Infrastructure Partners’ acquisition of Port of Brisbane. The sale was part of the Queensland State Government’s A$15bn privatisation programme. In the financial institution market, NAB has assisted borrowers, such as American Express, Bank of Queensland and National Wealth Management, diversify their funding sources. It stepped up as one of four bookrunners for a mammoth A$4.5bn refinancing for Amex, which showed NAB had improved its relationship with the client. The loan was oversubscribed with A$5.8bn in commitments garnered. Across the Tasman, NAB’s Kiwi subsidiary, Bank of New Zealand, secured several key sole lead roles on transactions for corporate clients, including New Zealand Comfort Group, Ravensdown Fertiliser, Metlifecare and Matariki Forests.

IFR Asia reviews 2011 in cartoons A selection of some of the best cartoons published during 2011 in IFR Asia.

The Australian and New Zealand bond markets endured a rollercoaster ride through the year with a strong start giving way to contagion fears as the deepening eurozone banking and sovereign debt crises spread alarm across the globe. JP Morgan was once again at the forefront of the lucrative 144a and US private placement markets, while remaining a significant player in the euro, sterling and Aussie dollar arenas. Overseas bond markets took on a dominant role for Australian and NZ issuers after the start of the summer, with many local firms looking to take advantage of record low yields in the US dollar market, in particular. These pricing advantages reinforced the benefits of the global markets, which offer longer tenor and better investor diversification than the Australian market. JP Morgan stood out with its ability to offer clients a broad product mix to meet their needs, encompassing senior, unsecured, secured, hybrids and liability management. The bank “remains the house of choice for Australian and NZ issuers thanks to its unrivalled execution capabilities, superior bond market knowledge and consistent ability to deliver results for its clients,” said Natalie Vanstone, managing director and head of debt capital markets for Australia and New Zealand. The reputation of its origination and syndication teams ensured JP Morgan garnered a large amount of debut and repeat businesses, as it again headed IFR’s international tables for Australian and NZ issuers. Among JP Morgan’s standout deals for the Australian corporate sector was as joint bookrunner role on Origin Energy’s US$500m 10-year note, as well as on Woolworths’ US$850m dual-trancher, Asciano’s US$1bn seven-year and Telstra’s US$1bn 10-year offerings. More importantly, it introduced a number of first-time issuers to the international investor base, widening the range of funding options for high-yield borrowers who would otherwise struggle to access the conservative local capital markets. The bank handled debut US dollar high-yield bonds for Midwest Vanadium, which raised US$335m in February, and for ASX-listed Mirabela Nickel, at US$395m in April. Away from US dollars, JP Morgan acted as joint structuring adviser and joint lead manager for Origin Energy’s €500m (US$664m) corporate hybrid offering and Brambles €500m seven-year debut – two rare euro-denominated deals in a year when European investors were among the most reluctant groups of investors. In the financial sector, JP Morgan was a joint lead on QBE’s Tier 2, US$1bn and £325m (US$503.6m) 30-year non-call 10s in May The bank took three of Australia’s four majors to the US dollar market, raising US$3bn, US$2.5bn and US$2.25bn from deals for CBA, NAB and Westpac, respectively, during the 12-month review period. It also helped Macquarie issue two deals for US$1.4bn, including a US$400m hybrid Tier 1 note in late 2010. In liability management, JP Morgan also arranged well-received tender offers for the government-guaranteed US$2.5bn NAB January 2012 and US$3.0bn Westpac December 2011 notes. The US house was also active in the Australian dollar market – for both domestic and overseas issuers. It arranged a rare A$700m (US$688m) corporate hybrid for Woolworths in late October, with the deal proving far more popular among institutional investors than initially expected. JPM also handled an A$200m three-year FRN for LeasePlan, while it brought global financial issuers Rentenbank and Lloyds Bank to the Australian market. In addition, JP Morgan was sole or lead bookrunner for Kangaroo issues from CEB, KfW and EIB. For its overall reach, especially in the most fee-generating markets, JP Morgan is, for the third year in succession, a worthy winner of IFR’s annual bond house award.

China, it is widely agreed, is the new engine of world growth. However, it is an engine that may need some tuning. As new champions emerge in one industry after another – from banking to telecoms and resources – some less desirable names and practices are also coming under the international spotlight. Although bankers are watching this with some alarm, it is really the international accountants who have most to be concerned. So far this year, three of the world’s four biggest accountancy groups have either been caught up in controversy about the accounts of their overseas-listed clients or have stepped away from clients out of growing concern about their books. The biggest incident involved Sino-Forest, a Chinese timber company that listed on the Toronto Stock Exchange in the 1990s and grew to become one of the largest forestry groups listed in Canada. It appeared a success story, raising more than C$3bn (US$3.1bn) in debt and equity over the years and reaching a market capitalisation of C$6bn as of March this year, reporting a 2010 of almost C$400m from a 780,000-hectare forestry portfolio in China. However, after a hedge fund’s damningly negative research report triggered a share price plunge, it was suspended from trading by the Ontario Securities Commission in August for acts intended to “perpetuate a fraud” – specifically, that it did not have the assets it said it did, nor the profitability. It is now also the subject of Royal Canadian Mounted Police investigations. Ernst & Young has been named in two class-action lawsuits around Sino-Forest. “The big four may step away from some high-risk Chinese clients for the sake of their own reputations,” Elsewhere, the big four accountants have started to become wary of their own clients. In May, Deloitte stepped aside as auditor of US-listed Longtop Financial Technologies, a financial software provider from Xiamen, citing concerns about its accounts. Longtop itself said Deloitte had quit after identifying false financial records on cash and loan balances, the deliberate interference by Longtop management in Deloitte’s audit process, and the unlawful detention of Deloitte files. Longtop now faces administrative proceedings from the SEC, while the SEC is suing Deloitte for failing to hand over documents on Longtop. Deloitte’s response is that Chinese regulators have not been allowed it to do so. The PCAOB published a study in March, identifying 159 Chinese companies that had listed on US capital markets alone through reverse mergers between January 2007 and March 31 2010. Between them, the 159 backdoor-listed companies had a market capitalisation of US$12.8bn as of March 31 2010. In January, KPMG said it had found possible irregularities in the books of China Forestry, which is listed in Hong Kong. China Forestry’s shares were then suspended, but not before the saga had embarrassed the banks that helped China Forestry sell US$300m of bonds just two months earlier. Standard Chartered, one of the arrangers of that sale, sold US$51m of stock for the former chairman only two weeks before KPMG’s report came to light. Other problematic examples include Nasdaq-listed RINO International, which makes pollution control equipment, but admitted in March that two previously reported contracts did not exist (it has since been delisted); and Duoyuan Global Water, listed in the US, which has been suspended after it borrowed money from related parties and booked it as sales. It is hard to say how widespread this problem is, but some estimates are troubling. A Moody’s report in July assigned red flags to the corporate governance of 61 rated Chinese companies, including some big names, such as Hong Kong-listed Winsway Coking Coal. It spoke of “the inherent challenges in assessing these Chinese companies: their short history of operations, their diverse industries with limited peers for comparison, their concentrated family-ownership structures, and their high-growth environments.” No matter how w

Hong Kong property conglomerate Cheung Kong (Holdings) and chairman Li Ka-shing are known locally as the most astute of investors. Aside from its phenomenal property portfolio in Hong Kong, where it has developed one in every seven private residences, its track record of strategic investments is second to none. From humble beginnings as a plastics manufacturer, the group has acquired assets ranging from telecoms and power plants to life sciences, and now controls Hong Kong-listed entities with a market capitalisation of HK$785bn (US$101bn) at the end of October. Cheung Kong, the group’s flagship, brought its characteristic clout and dexterity to the capital markets in 2011, taking advantage of favourable conditions with a number of well-timed and adventurous deals in both debt and equity – as well as somewhere in between. Its fundraisings over the past 12 months reflected the dominant themes of the year. Whether it was selling the first renminbi-denominated shares in Hong Kong, a rare bond issue in Singapore dollars, or a ground-breaking perpetual hybrid, Cheung Kong was consistently ahead of the curve. The holding company is a rare issuer in the debt capital markets, as it typically prefers to fund its capital expenditure and acquisitions through operating subsidiaries, such as Cheung Kong Infrastructure or its real-estate investment trusts. According to Thomson Reuters data, the holding company had debt outstanding of just US$341m at the beginning of November 2010, versus its earnings for that year of US$3.4bn and market cap of US$27.0bn. Since then, however, it has boosted its presence in the bond markets, raising over US$1.1bn in Singapore dollars in a move that underlined its foresight and its ability to react quickly to changing market conditions. Cheung Kong, having raised S$225m (US$175.5m) in a five-year deal in November 2010, was quick to spot another window of opportunity as ultra-low benchmark rates in Singapore began to offer an advantage over the traditionally deeper Hong Kong market. Cheung Kong placed a S$500m dual-tranche issue in July of five- and seven-year bonds at 2.585% and 3.408%, respectively. This unleashed a wave of similar deals in quick succession from Hong Kong peers Wharf Holdings, Wheelock Properties and Henderson Land. Significantly, the Cheung Kong deal also served as a precursor to its landmark S$500m senior perpetual in September. Cheung Kong’s was Asia’s first senior perpetual, and the first hybrid in Singapore from an overseas issuer. Meeting criteria Subsidiary CKI had started the ball rolling for Asia’s corporate hybrid market with a US$1bn benchmark in September 2010, but the parent company took a different tack a year later. The S$500m perpetual bond showcased both the growing depth of Singapore’s local investor base and the ability of Asia’s local debt markets to withstand some intense global volatility. It also cashed in on an increased flow of foreign capital into Triple A rated Singapore in the weeks that followed Standard & Poor’s downgrade of the sovereign credit rating of the US. Previous perps from Asia, including those in US dollars, had all been subordinated, meeting the criteria for partial equity treatment that credit rating agencies had set. Cheung Kong decided to test a senior structure – a first in Asia – that would allow it to get full equity credit under IFRS rules, prioritising accounting treatment over any impact on its credit rating. Cheung Kong has an unsolicited A– rating from S&P. At the same time, it offered investors a higher level of credit comfort since the bonds were not subordinated. The senior bonds came without many of the investor-friendly elements used in other perpetuals, making it more attractive to the issuer. There was no coupon step-up and no restrictive covenants, as well as no mandatory coupon deferral. The notes are callable at par any time after five years. DBS Bank and JP Morgan were joint bookrunners. “Our gearing is low, so it didn’t

IFR Asia reviews 2011 in charts Please click on the arrows to scroll through the graphics published during 2011 in IFR Asia.

No stranger to the top of the league tables, UBS showed no signs of resting on its laurels in Australia’s equity capital markets. It brought innovative deals to the market, executed trades flawlessly, and showed the guts to hard underwrite transactions even in challenging markets. “We continued to dominate Australian equity capital markets by bringing more issuers to the market over the review period than any other bank, using a range of equity structures,” said Simon Cox, managing director and head of ECM syndication at UBS Australia. The bank topped the league tables for the review period with a whopping 24.2% market share, having headed 34 deals for A$5.35bn (US$5.26bn). Second placed Macquarie led 18 deals for only A$2.22bn – less than half UBS’s tally. The sheer domination meant UBS led almost every deal done in Australia during the review period, introducing a number of unusual structures in an effort to deliver the best solution to its clients. UBS in February jointly led an A$992m fundraising for West Australian Newspapers Holdings in a deal that stood out from the pack. The company raised A$652m through a four-for-seven entitlement offer of convertible unsecured loan securities (CULS) and a further A$40m through a public equity offer. CULS convert on a one-for-one basis into ordinary shares, but only if the acquisition is completed. If the acquisition does not happen, the CULS are redeemed, with holders getting their money back plus a 2.5%–4.5% redemption premium to the last share price. The product had been used before in Australia, but not since 2006, and was seen as an effective way of allowing the company to finance a major acquisition without requiring equity investors to take on a huge amount of risk on the acquisition. WAN’s CULS ensured funding certainty for the equity component of the acquisition consideration. The company’s existing institutional shareholders, with the exception of acquisition target Seven Group Holdings, subscribed to around 90% of their entitlements. In addition to the CULS, an A$300m block placement was completed, as Seven Group Holdings sold shares at A$5.60 – a premium to the A$5.20 CULS entitlement price. The block shares also came with the entitlement to buy CULS at A$5.20. UBS underwrote some jumbo blocks in difficult markets. During the review period, it underwrote more substantial transactions than any other bank in the Australian market. In March, it acted as sole underwriter for ACP Magazines, a subsidiary of Australian media group Nine Entertainment, on the A$562m sale of its 49.1% stake in used-car website carsales.com in an opportunistic block trade, allowing ACP’s ultimate owners CVC Capital Partners to exit a major investment in the capital markets rather than through a time-consuming strategic sale. ACP sold 114.2m carsales.com shares at A$4.92 each, a discount of 6.1% to the March 4 close of A$5.24. It is understood that there was no formal pitching for the deal, even though analysts had not expected Nine to be a long-term holder of the stock, but that UBS instead approached the vendor with a proposal formulated over the weekend. It was also sole lead and underwriter on Transurban’s A$903m block trade – the largest in 2011 – and the third largest in Australia in the last five years. The sale was conducted before market at the underwritten fixed price of A$5.23 for a narrow discount of just 2.4%. Similarly, UBS underwrote Leighton Holdings’ A$757m accelerated renounceable entitlement offer in April. Australia’s IPO market suffered from continued uncertainty over the 12 months, but UBS began the review period on a high with its joint bookrunner role on the A$4.1bn IPO of QR National, the country’s second largest listing on record.

A central character in recent Chinese accounting issues is a man called Carson Block, who founded a research firm and investment manager called Muddy Waters. The name does not come from the blues singer, but a Chinese expression – muddy waters make it easy to catch fish. In other words, there are opportunities to make money when things are opaque. A “strong sell” call Block made on Sino-Forest on June 2 set in motion its share-price collapse and subsequent investigations and lawsuits. Block does not pull his punches. The report, issued at a time when Sino-Forest stock was riding high, said the company “was aggressively committing fraud since its RTO [reverse takeover] in 1995” and was “a multi-million dollar ponzi scheme, accompanied by substantial theft”. More specifically, it claimed the company had dramatically overstated its forestry holdings and passed revenues through a host of intermediate companies in order to confuse auditors. A look at the Muddy Waters research list shows only “strong sell” recommendations in all cases on companies, where fraud or at least mismanagement is alleged – Orient Paper, RINO, China MediaExpress and Duoyuan Global Water. In Block’s view, fraud is widespread in China and the big-four firms face great challenges in detecting it. One of his central points is that a company can, in a sense, fake transparency, in that it provides a great deal of information, but not the right sort. He argues that auditors may be looking for aggressive accounting, but not a situation where the underlying business does not even exist. Still, there is another side to this coin. Block is not just an advocate of good governance in the mould of renowned Hong Kong gadfly David Webb, or Allen’s ACGA; he is there to make money and, in every instance, has built a short position in the stocks he then hammers in his reports, profiting from their subsequent share declines. Block is open about this: whenever interviewed, he points out himself that he is conflicted. He did not respond to requests for comment for this article. However, the power of raising a red flag can be very destructive. Raising doubts about accounts is all but guaranteed to knock a share price hard and provide gains to anyone shorting the stock. The latest name to appear is Silvercorp Metals, another Toronto-listed Chinese company, which an anonymous whistleblower accused in early September of a “potential accounting fraud” worth US$1.3bn. Silvercorp has strongly denied this, publishing many documents to support its accounts. It has also retained analyst support, such as broker BMO, which maintained an “outperform” rating on the stock after the allegations. Also, it has apparently come out of a KPMG forensic audit looking clean and, as yet, the Ontario Securities Commission has taken no action. No matter, the share price fell 10% in a day anyway when the allegations were made. Its management said there had been a dramatic increase in short positions on its shares in the previous two months. This is a central point: there is actually nothing new in irregularity in accounts for overseas-listed stocks. What has changed is scrutiny. “The difference is that people like Muddy Waters and other hedge funds are realising there are problems, short selling, putting out reports and publicly criticising,” Allen says. “They are essentially taking advantage opportunistically of a problem that is real, but I don’t think you will necessarily find in every PRC company listed in the US.”