Each week analysts pore over percentage changes in the market share of Baidu, China’s answer to Google and the dominant force in the country’s internet search market. The trouble for investors is that, at the moment, such details look irrelevant as the company’s share price tanks. Baidu and other Chinese companies listed in the US are caught in a dispute between regulators and auditors sparked by a number of accounting scandals. It looks increasingly likely that Chinese companies listed in the US will have to find a home elsewhere.
Last week, the US Securities and Exchange Commission began proceedings against Chinese affiliates of the big auditing firms for refusing to produce audit papers on Chinese companies under investigation for suspected fraud. The problem is that auditors cannot hand over papers because they risk breaking Chinese law by revealing state secrets (or so they argue). While regulators and auditors fight it out, investors are left hanging on for an almost inevitable outcome – that Chinese audits will not be accepted by US regulators and those companies will either have to go private or move to another stock exchange.
The SEC is determined to fight this one tooth and nail through a 300-day court review in the US. Yet there is value in some of the US-listed Chinese companies. Baidu’s net income is set to grow 60 per cent this year and in spite of fluctuations, its market share of internet search in China is about 80 per cent. Meanwhile, its share price has fallen by a quarter this year to trade at its lowest level on a price earnings basis since it listed on Nasdaq in 2005.