A worker washes lemons inside a Sweetgreen Inc. restaurant in Boston, Massachusetts, U.S. (Photographer: Adam Glanzman/Bloomberg)

As China Serves Stock Lemons, Singapore Exchange Makes Lemonade

(Bloomberg) -- First the stock fell 90 percent. Then it stopped trading altogether. That was two and a half years ago. In November, hapless shareholders got the firm’s annual report… for 2015. And even that came with an auditor’s note that $69 million of cash the management said was in Chinese bank accounts couldn’t be verified.

When I wrote about China Fibretech Ltd. in April last year, the Singapore exchange had just filed complaints with Chinese authorities against Wu Xinhua, executive chairman and CEO of the Fujian province-based fabric dyer, in relation to “several alleged offenses under the Chinese Penal Code.” The update to that unhappy saga is that it may have a happy ending after all.

Independent directors of the Singapore-listed company have managed to persuade a Chinese state-owned enterprise, China Capital Investment Group Co., to come in as a savior, taking a 24.5 percent stake. A clutch of other new investors will join in.

Fabric dying is out. The company, which wants to change its name to Raffles Infrastructure Holdings Ltd., will now own a 91 percent stake in a rural build-operate-transfer road in Sichuan province. After that, it’s all about using its SOE connection to get more belt-and-road deals.

Tan Boon Gin, the white-collar-crime specialist who heads up Singapore Exchange Regulation, or SGX RegCo, a unit modeled on NYSE Regulation Inc., says a good outcome in this situation had to have two components: resumption of trading; and proper investigation and enforcement in China. Alleged irregularities involving $70 million in compensation payments to customers depleted most of the firm’s presumed cash. Both of Tan’s goals may now be met. Based on the findings of a special audit that KPMG LLP is being tasked to carry out, China Capital Investment will initiate enforcement proceedings, if required, against Wu.

At its peak, China Fibretech was just a $100 million company. Yet the boom-bust tale offers several lessons. For one thing, it shows the predicament of foreign exchanges. All of them want to attract genuine Chinese entrepreneurs — but the lemons come as part of the package. Toronto saw Sino-Forest Corp. blow up in 2012; Hong Kong witnessed the share collapse last year of China Huishan Dairy Holdings Co. There have been many other debacles in between, damaging the reputation of hosting venues. But the implications are often global. Before Hanergy Thin Film Power Group Ltd. flamed out, the Hong Kong-listed solar giant was 11 percent of the popular Guggenheim Solar Energy Index ETF in the U.S.

Now, it’s one thing for a Canadian court to hand a $2.6 billion fraud judgment against Allen Chan, the Sino-Forest co-founder and CEO. Enforcing that award would be another matter. While $70 million is chump change by comparison, maybe the Singaporeans are taking a smarter route by roping in a Chinese state-owned enterprise.

When it comes to working the legal machinery on the ground, even a bit player — China Capital Investment has assets of about $500 million — will do. It isn’t that the People’s Republic condones misbehavior overseas by private actors. But for a government entity to make suffering Singapore shareholders their priority requires a push from one of their own.

Tan is right. Fibretech isn’t a template for other problematic Chinese companies in Singapore — every one of the 36 firms with trading suspended for more than 18 months will require a tailor-made approach to preserve some value for shareholders. Fibretech’s independent directors were enterprising enough to seek and get a white knight. Most others won’t even try.

That’s the bigger lesson. Directors can’t be out counting Sino-Forest’s trees, Huishan Dairy’s cows or Fibretech’s cash. Yet taking up an independent directorship of a company where assets and executives are offshore comes with special responsibilities.

If nothing else, in the event they do get handed a lemon, they should at least try to make some lemonade.

  1. China Paper Holdings Ltd. last traded in January while Fujian Zhenyun Plastic Industry Co. has been under trading suspension since December of that year.

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