Chinese stocks lose their luster in US markets

High-flying shares in Chinese companies have come crashing to the ground recently, amid a flurry of accounting scandals and a crackdown by US regulators. Less than two months ago, US investors were eagerly buying shares in Renren, a social-networking company dubbed the "Facebook of China," and other firms that seemed poised to benefit from China's rapid economic growth. Renren's shares jumped 29 percent on the day of its initial public offering (IPO) on the New York Stock Exchange in May. Then they sank, closing at just $7.03 on Friday, down to about half of their IPO price of $14. Of the 12 Chinese companies that have debuted on US exchanges this year, only two are trading above their IPO prices, according to data from Morningstar, an investment research company. "The drumbeat out of China right now is that certainly there's an air of fraud and of different sets of numbers for Chinese reporting versus US reporting," said Bill Buhr, an analyst with Morningstar. "It basically is spooking investors. I think they assume that where there's smoke, there's fire," he added. The fallout threatens even firms which have not been tainted by accusations of wrongdoing, such as search engine Baidu, which closed at $117.68 on Friday, a drop of nearly 25 percent from its intraday high of $156 in April. "Is This the China Bubble Bursting?" asked a recent headline in The Wall Street Journal. The most recent Chinese company to fall under a cloud is Harbin Electric, whose stock has plunged more than 40 percent since Thursday, when a research firm accused it of falsifying documents. Harbin Electric, a machinery maker listed on the NASDAQ, has denied the accusations. The Securities and Exchange Commission has halted trading of several Chinese firms this year, accusing them of violations like keeping two sets of books or failing to disclose that their auditors had quit. Last week, the SEC said it was probing two more firms -- China Intelligent Lighting and Electronics and China Century Dragon Media -- for submitting "materially misleading and deficient offering documents." "It will be difficult for Chinese IPOs to go forward in the US until the managements of companies decide to improve their operational and financial disclosure," said Linda Killian, a principal at Renaissance Capital, which researches the IPO market. Many of the Chinese companies being probed by the SEC listed on US exchanges through "reverse mergers," a controversial technique in which a firm seeking to go public acquires a publicly traded shell company. Financial reporting requirements are not as stringent for reverse mergers as they are for traditional IPOs, and the SEC issued a warning about the practice earlier this month, which singled out several Chinese firms. "Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies," Lori Schock, an SEC official, said in a statement. Other factors have also harmed Chinese IPOs, such as rising inflation in China, tighter capital requirements for Chinese banks and civil unrest in smaller Chinese cities, said Killian of Renaissance Capital. As the craze for Chinese IPOs has waned, commentators such as stock-market guru Jim Cramer have turned their attention away from China's strong growth prospects and towards its weak record on corporate governance. "There's very little corporate governance, informal auditing, and of course, the prospect of government intervention since, remember, it's still officially a communist country," Cramer said on CNBC television.