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Canadian citizen Huang Kun, seen here in May, is now in a jail in central China, expecting to face criminal charges.
Canadian citizen Huang Kun, seen here in May, is now in a jail in central China, expecting to face criminal charges.


In China, Silvercorp critic caught in campaign by police Add to ...

On the afternoon of Dec. 28, Huang Kun was about to board a flight to Hong Kong when his Canadian passport was flagged by officials at Beijing’s International Airport, and he was taken into custody by Chinese police.

It was the beginning of a prolonged and often frightening ordeal for Mr. Huang that has landed the 35-year-old from British Columbia in a Chinese jail – sharing a one-bed cell with 20 other men. He is expected to soon face charges of criminally defaming a Vancouver-based mining company called Silvercorp Metals Inc.

Mr. Huang knew when he went to the airport that day that police in the city of Luoyang, where Silvercorp’s flagship mining operations are located, had arrested and interrogated two associates of his. The men had helped him prepare a scathing research report that, when its allegations were published, sent Silvercorp’s share price tumbling 20 per cent in one day on the Toronto Stock Exchange.

What he didn’t know was that in the wake of a series of scandals involving Chinese companies listed on North American stock exchanges, authorities in China had decided to push back hard against those attacking the credibility of Chinese firms. Many of these critics had made small fortunes by “shorting” the stocks of those firms, essentially betting that their share prices would fall once the new information was revealed. Mr. Huang worked for one of those short-sellers.

In this case, documents obtained by The Globe and Mail may suggest that Silvercorp and its executives were working in concert with local authorities, and helping to pay for the investigation against Mr. Huang and his associates. Legal experts say Silvercorp’s alleged actions may be in violation of both Chinese and Canadian law.

The campaign to clear Silvercorp’s name – and the apparent official support for it – appears to be part of a remarkable effort to punch back against North American short-sellers who have badly damaged the image of Chinese firms over the past two years with a stream of reports alleging fraud, flawed accounting and corporate governance failures. More than a dozen Chinese companies listed on North American exchanges have collapsed as a result.

The failures have damaged the country’s corporate reputation and prevented many Chinese companies from raising money from North American investors, at a time when China’s corporate and political leadership is trying to play a bigger role in global business and finance. This week, China’s official Xinhua newswire, a mouthpiece for the Communist Party government, praised a group of Chinese businessmen who have publicly attacked short-sellers like those who employed Mr. Huang. Xinhua connected the fight to China’s broader effort to be treated as an ordinary player on the global capital markets.

“Due to differences in political systems, economic structures and culture, foreign investors are prone to view Chinese companies with suspicion and prejudice,” Xinhua wrote. The newswire linked such “suspicions” to foreign governments blocking takeover bids by champion Chinese firms such as China National Offshore Oil Corp. (whose $15.1-billion (U.S.) bid for Calgary-based Nexen Inc. is currently being reviewed by Ottawa) and telecommunications giant Huawei Technologies Co. Ltd.

The most high-profile Chinese corporate meltdown was that of Sino-Forest Corp., which was once Canada’s largest publicly traded forestry company, boasting a market value of more than $6-billion (Canadian). Short-seller Carson Block and his firm Muddy Waters accused the timber company of fraudulent activity in June of 2011. Sino-Forest has now been de-listed from the Toronto Stock Exchange, is insolvent, and the Ontario Securities Commission has levelled fraud charges against several of its top executives.

Chinese authorities are understood to be deeply concerned about the reputational damage caused by the wave of corporate scandals. And they want the bad press to stop.

“The attacks by shorters and the issues related to a number of U.S.-listed Chinese companies have caught the attention of officials at the Ministry of Commerce and the National Development and Reform Commission,” said a Canadian lawyer with high-profile Chinese corporate clients who is well connected in Beijing and spoke on the condition of anonymity.

“They don’t think it is necessarily a single isolated action. So things like this have started to climb to the top of attention among senior officials.”

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