Block Says Fraudulent Chinese Companies Pose Risk to U.S.

(Bloomberg) -- Fraudulent Chinese companies pose a risk to U.S. markets and investors should consider the nation’s equities "sin stocks," said short-seller Carson Block.

"I don’t think there’s any parallel in the history of capital markets where you’ve had this systemic issue of literally hundreds of frauds going to another country’s capital market to suck up capital and expatriate it to their home country," Block said at the Bloomberg Invest conference in New York Tuesday.

Block, who runs Muddy Waters, pointed to the documentary “The China Hustle,” which found that there were 400 fraudulent Chinese companies listed in the U.S. in the last decade from the People’s Republic of China.

There are multiple issues contributing to the risk, Block said. First, China can list fraudulent companies in the U.S. with impunity, he said. Second, Chinese companies operate at the behest of the government.

“In China, there is no such thing as a purely private company,” he said. “The private companies will do the bidding of the state when they are required to do so."

China also doesn’t operate within the same rules as many other countries when it comes to issues such as intellectual property theft, he said. The nation intends to degrade Western economies and transfer wealth from them, he added.

"We should start looking at China equities as sin stocks where, from a governance perspective, it’s something where allocators should be asking themselves whether it’s something they should own," Block said.

Block, whose Muddy Waters is activist investment firm, achieved prominence wagering against Chinese companies and publishing detailed reports on his reasoning. One of his past targets was forestry company Sino-Forest Corp., which lost more than two-thirds of its market value in two days after Block first criticized it in 2011, and was subsequently delisted.

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