Sino-Forest: a prolonged moan from the investigators

Sino-Forest’s troubles give a valuable glimpse of the inner workings of Chinese “capitalism”


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.


Sino-Forest: a prolonged moan from the investigators

  1. Agreed on your last paragraph.  Most of the commentariat skips right over the first word in “socialism with Chinese characteristics” when describing the wave of the future.

  2. I’ve been working in auto sector for just over a decade and conversations I’ve had with North American executives about their operations in China make extremely weary of any Chinese business. 

    ChiComs are essentially mafioso who have control of huge economy – I have heard all sorts of outrageous stories about corruption, shakedowns, “backer’s” supposedly helping laowai, no laws or private property. If I owned firm that sold goods/services, I would sell things to China but not locate plant or operations there because it is nightmare and the system will end up corrupting you and your firm. 

  3. What no one in the media reported is that this final report came to the conclusion those relationships do not affect historical cost under GAAP. You can spin this as you like but the Q3 and Annual report are almost ready to be released. They are now valuating Dec 31 Tree Inventory for the Annual report.
    As for your last statement on the USSR watch Europe implode on 400% debt to GDP and bank failure across the globe.Unfunded pension of 30 trillion Euros show how absolutely corrupt the Western capitalist system is.
    Whats interesting is the USD. By bypassing the use of the USD in bilateral trade watch trillion of USD come back to the USA.

    • Many people are missing the change in accounting from GAAP to IFSR and how it is affecting certain companies.  Right now Canadian insurers like Manulife, Great West, Sunlife, etc. are the most shorted on the TSX.

      This January 31, 2012 had to be released unfinished because that was the deadline.

      • Two senior series of bonds went into default for missing Q3. The Waiver agreement extended the deadline with a 10 mil penalty.
        The related party transaction was holding up the Q3. Historical cost could not be established until now under both GAAP and IFRS. Market value will be determined as at Dec 31, 2011.
        Cash verified.
        Tree inventory verified.
        Only market value to be done by Murray.

  4. Sorry, I don’t get it.  So, moving your business to China from, say Canada or the United States, is so fraught with corruption and lies that you may not know you are being fleeced for years or even decades.  Fine.  But are the economic doom-sayers saying companies will “move to China” or are they saying they will move their labour intensive production to China–perhaps by contracting it out?  Because it seems to me that the economy (which may be different from The Market) cares about the jobs, not necessarily the profits.

  5. Glad you are covering this CC as the storey has so many legs.  The harm it has done to other companies who are operating in China is disgusting.  All the chicken sh!t “analysts” have downgraded anything Chinese to cover their un-informed butts.

    Good example is GLG Life Tech Corp. which grows and processes high purity stevia (an all natural, zero-calorie sweetener used in food and beverages).  Last year the “talking heads” had a $14/share target which allowed them to raise $44 million at $11/share bought deal financing.  They are getting approval for their stevia in country after country – everything moving along well for a new product.  Then the Sino-Forest debacle and they got crushed as well.  A missed third quarter in sales and the same “talking heads” downgraded the stock to under $2/share.  Crazy.  Yes, location must always be a big part of choosing to invest, but this China stigma has gotten way out of hand.

    A good commentary on TRE in the Montreal Gazette  

    • I agree the stigma has gotten out of hand, but that’s the way these sorts of stories always play out.  Bre-X negatively affected every single mining issuer with a stock exchange listing in Canada.  Was that fair to all of those other mining issuers?  Of course not.  And that’s why you want to create a regulatory and disclosure environment that people can have a reasonable amount of trust in.  One of the key issues here is that a relatively immature capitalist economy and business culture like China’s is not used to dealing with the kind of disclosure and due diligence standards that North American businesses take for granted.  Conversely, North American investors, underwriters, lawyers and regulators are not experienced in assessing some of the unique characteristics of Chinese businesses.  The TSX is currently having meetings with industry stakeholders in a well-intentioned attempt to try to close that gap.  It will be interesting to see what they ultimately come up with, in terms of proposals.

    • Why are you complaining? It never fails to mystify me when supposed investors complain about downward price pressure in a company they like. If what you say is true, it’s raining soup! Grab some buckets!

      That you’d rather wander the internet complaining tells me everything I need to know.

    • A bitter dipper and his conspiracy theories….sigh. 

      • If that kind of sentiment makes you feel all warm and fuzzy, then so be it. It’s not true, but what’s the value of truth these days….

        • Don’t you think Glavin’s column is just a little bit overwritten and alarmist?

    • Your article is very close to the real truth, that Harper is a 33rd degree Freemason, and his cabinet are members of the Bohemian Grove. The ChiComs are actually shape-shifting “Reptillians” bent on world domination through Alberta’s “dirty” oil, using greenhouse gasses to make the world the perfect temperature for their hatchlings.

      Terry Glavin and Lyndon LaRouche were right!

      • Superb.

  6. Utter nonsense – I do business in China – they do not do business like Sino Forest and have not for the past 20 years.These are myths promulgated by gullible Western bloggers and those who are involved in fraud.

  7. I like the article because Colby does not start off with the presumption of guilty.  As a contrarian..I would say that the Shareholders and Bond Holders are the injurred and where did the system fail.  Carson Block is a Short and Distort profiteer..and, with respect, in the system that exists he is the best.  I think if the SEC, OSC weren’t just mindless bureacrats there would have been a  happier solution for all.  I do know the end to this story..because there are many legitimate Chinese Companies offering great returns for North American investors and they are slowly packing up their bags and moving elsewhere.  Why should they put up with trading at 2 times Cashflow when US equivalents trade at 5 to 10 times that.  The will exit the US and have to deal with the Greedy Class Action Lawyers..that will collect only from the innocent. 

    The next time the Politicians try to gain points by punishing the innocent, they should not shoot the North American investors to get their votes.  Oh ..I forgot the SEC and OSC has alway been brain dead.

    • Speaking of the SEC, just this past week I read a few articles that they are considering reinstating the “uptick” rule which they removed in July 2007.