Skip to main content

Lumber workers process Yunnan pine at the Gengma Forest Product Corp. Ltd. lumber yard in Gengma, Yunnan Province, China on June 10, 2011. Sino-Panel, a subsidiary of Sino-Forest, purchased forest land from Gengma Forest Product Corp. Ltd. and used the processing factory.

Adam Dean/Adam Dean

"Muddy waters make it easy to catch fish," allegedly a Chinese proverb, is not a self-evident truth. Muddy Waters Research, which takes this as its motto, is using inflammatory rhetoric in its questionable allegations about Sino-Forest Corp. The waters which Sino-Forest, and other Chinese companies listed on North American stock exchanges, navigate may yet attain greater clarity, which is why the Ontario Securities Commission's announcement last week that it is looking into "matters" to do with Sino-Forest is welcome - as is the company's own engagement of PricewaterhouseCoopers to examine the allegations.

Similarly welcome is the U.S. Securities and Exchange Commission's bulletin last week recommending caution about companies that have gone through "reverse mergers" or "reverse takeovers," a technique by which private companies cause themselves to be taken over by public companies, thus obtaining listings without going to the trouble of initial public offerings. That is how Sino-Forest came to the Alberta Stock Exchange and the Toronto Venture Exchange in 1994 and 1995.

Carson S. Block of Muddy Waters' relentlessly hyperbolic comparisons of Sino-Forest to Bernard Madoff and Ponzi schemes, and his relentless repetition of the word "fraud," undermine his own credibility, even if he eventually turns out to be right.

Story continues below advertisement

But Sino-Forest might well have spared itself much grief, if its 2010 financial report had supplied a clear picture of its relationship with its "authorized intermediaries" in China - customers, or distributors in the actual sale of its wood. The status of these intermediaries, only fleetingly mentioned in the financial report (and mostly in the technical context of Chinese tax policy and contingent liabilities), is among Mr. Block's main targets. They evidently are an essential element in Sino-Forest's way of doing business in China, and that may be normal there. A more integrated approach may in the end be desirable. In any case, investors are entitled to a fuller account of how the company actually works.

Any shortage of transparency in the businesses of Canadian-listed companies in China is likely to increasingly spook investors.

Canadians should not retreat from China; instead, they should strive for a better understanding of Chinese businesses - and business practices - and Chinese firms should help by making themselves less muddy and more intelligible.

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.