Recommended to those following the Sino-Forest story: the final report from the independent committee empanelled by the company’s board of directors to investigate the company’s claimed assets and its relationships with suppliers. I have to say the report confirms what I thought in June: the issue with Sino-Forest is not necessarily fraud, but with the practical impossibility of confirming almost anything about its secretive business model. The committee did confirm that Sino-Forest’s cash holdings had been reported accurately, and was able to follow some selected title claims to timber more or less back to the actual trees. But with some extra emphasis on the “less”.
Could a curious investor look at actual maps of timber controlled by Sino-Forest agents, you ask? Well, you see, it’s not exactly kosher for foreigners to carry around maps of remote parts of China. You can borrow them from forestry officials if you really need to. Will the local forestry bureaus confirm Sino-Forest’s claims about plantations operated by its agents? Well, sometimes they’ll give you a certificate of sorts, for all the good it might do. “The confirmations are not title documents, in the Western sense of that term,” the committee report notes. (As I understand it, the Western meaning of “title document” is that it gives one an unquestioned, justiciable claim to ownership of something, whether the Party or the Army or the good Lord in heaven approve or not.)
With regard to the evidence of inappropriate personnel connections between Sino-Forest’s Chinese intermediaries and its suppliers, the report confirms that there are problems, admits that it will now be all but impossible to get to the bottom of those problems, and adds a new wrinkle, in the form of a layer of undocumented “backers” who are apparently quite pivotal to Sino-Forest’s operations.
…[B]ackers are individuals with considerable influence in political, social or business circles, or all three. …[S]uch backers or their identified main business entities do not generally appear in SAIC filings by the Suppliers or AIs [authorized intermediaries] as shareholders thereof and, in most instances, in any other capacity. …[There exists] little information to validate the political or business connections of such backers, or the nature of the relationship between the backers and the Suppliers or AIs. There is no documentary evidence of the nature of their support for their respective Suppliers or AIs nor the consideration (if any) received by the backers for their support of the Suppliers or AIs.
The impression given is that you need influential “backers” to do business in China. The question for the Western investor, though it’s probably now moot, is whether the real role of these backers is to help exploit Chinese resources for the benefit of the Western shareholders or to help fleece Western shareholders for the benefit of Chinese suppliers and bureaucrats.
To those of us with no particular interest in Sino-Forest as such, its troubles give a valuable glimpse of the inner workings of Chinese “capitalism”—so often thought to be the force that will ultimately out-compete and destroy our own clumsy original prototype, because of its efficiency and energy and blah blah blah. I remember hearing the same things about the Soviet Union when I was a young man; and the political economy pictured in the various reports on Sino-Forest, with its cronyism, its obstructionist officialdom, its paranoia about spying, and its uncertain property titles, sounds a lot more to me like the USSR’s in 1975 than ours in 2050. I could be wrong.