China Aviation Oil's (中國航油) spectacular trading losses in Singapore highlight the risks of becoming involved with Chinese firms as they increasingly seek listings on international exchanges, analysts warn.
Chinese companies venturing overseas go to great lengths to appear as if they have the same strict corporate governance standards as those in developed economies, but analysts say the changes are often merely cosmetic.
"They have been dressed up but you can't really take them out," the managing director of the Political and Economic Risk Consultancy in Hong Kong, Bob Broadfoot, said.
Broadfoot said the financial scandal surrounding Singapore-listed China Aviation Oil and its high-flying chief executive, Chen Juilin (陳久霖), reflected a culture of low accountability and transparency in many Chinese firms.
China Aviation Oil hit the headlines last week when it appealed to Singapore's High Court for protection from creditors after losing US$550 million in speculative oil derivatives trading that began last year.
The news shocked investors and financial authorities as the company had been regarded as one of the most reputable and successful of the more than 60 Chinese firms listed on the Singapore Exchange.
With a monopoly on importing jet fuel into China's booming aviation industry and having the backing of the Chinese government through a state-run firm owning a majority stake, China Aviation Oil was a darling of investors.
Indeed, the Securities Investors Association of Singapore, which acts as a watchdog for small investors, last year gave China Aviation Oil its "Most Transparent Company" award.
Chen, 43, also won glowing praise, with the local press in Singapore running lavish profiles and global institutions such as the influential Swiss-based World Economic Forum last year naming him as one of 40 "New Asian Leaders."
But now Chen, who flew to China immediately after news of the scandal broke, is wanted by Singapore authorities as they conduct a criminal investigation into the affair and allegations of insider trading are raised.
China Aviation Oil is particularly coming under scrutiny for failing to disclose its perilous financial situation to shareholders when the company's parent firm reduced its stake from 75 percent to 60 percent on Oct. 20.
"This is one more example, and there have been many, where the corporate governance standards of red chips are not what they should be," Broadfoot said, using the term given to Chinese firms listed overseas.
"When it comes to red chips, they are not the most reputable organizations in the world right now," he said.
International credit ratings agency Standard and Poor's expressed similar sentiments in the wake of the China Aviation Oil fiasco.
"The current financial difficulties of China Aviation Oil ... highlight the risks surrounding many China-based and China-related corporates as a result of limited transparency," Standard and Poor's said in a statement on Friday.
Standard and Poor's said it had been misled when it assessed China Aviation Oil as having a "moderate financial profile" in a survey on "China's top 100 corporates" released in October.
"Had information about the losses been available in October, when they occurred, Standard and Poor's opinion on the credit profile of CAOS (China Aviation Oil) would have been even lower," it said.
"CAOS' situation lends credence to Standard and Poor's previously expressed view that complex corporate structures and unreliable accounting practices make it difficult to perform substantive analysis on some China-related companies in the survey.
"On the accounting side, the problem of limited disclosure is compounded with problems of compliance."
Broadfoot said the risk for foreign investors and stock exchanges to become caught in Chinese financial webs was increasing as more and more firms from China looked to raise capital by listing overseas.
As in Hong Kong and elsewhere around the globe, the Singapore Exchange has actively sought Chinese firms to list with it and its safeguards have come under question over the China Aviation Oil fiasco.
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