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A statue of a bull is seen outside Exchange Square (L), where the trading hall of the Hong Kong Stock Exchange is located, May 24, 2010.

Bobby Yip/Reuters/Bobby Yip/Reuters

The accounting troubles and short-selling attacks hitting China-based companies are creating fertile ground for the rumour mill to flourish, with some shares hammered by chatter rather than actual evidence.

Such stock swings have created a dangerous climate for even strong Chinese companies and put regulators on high alert for market manipulation.

This week, China-based meat processors China Yurun Food Group Ltd. and Zhongpin Inc. have seen huge volatility in their shares on heavy volume, prompted more by rumour than hard facts.

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The combination of slowing global economic growth, China's own sluggishness and growing distrust of Chinese accounting means investors are much more sensitive to the smallest whiff that something may be amiss.

They are right to be concerned.

A slew of Chinese companies listed in North America have been hit by accounting problems, delistings, and negative research reports. The volume of short sellers betting against these companies has grown.

Some companies have come under pressure for no other reason than they're based in China.

"Any report that comes out on these companies now seems to hit the front pages of the business press," said Christopher Clarke, a lawyer at DLA Piper in Hong Kong.

"There is a strong risk that companies that have not behaved fraudulently but perhaps been a bit unsophisticated could get unfairly caught."

In some cases, executives who quickly responded with facts and figures to market concerns were able to stop the selloff.

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The chief executive officer of Nine Dragons Paper Ltd. struck back at Standard & Poor's earlier this month, a day after S&P withdrew its ratings citing the inability to access key information.

After the S&P announcement, the market sensed another Chinese accounting scandal, and sent Nine Dragon's stock plunging into a trading halt. The next day, the CEO came out swinging, denying S&Ps claims and its stock recovered.

Shares of meat processor Yurun recovered a bit on Wednesday, though they're still well below the levels they traded before market talk of a report likely by Muddy Waters.

Yurun lost around $2-billion U.S. in market value over the past few trading sessions, mainly on speculation it might be the target of a negative report by short seller Muddy Waters - a report that has yet to surface.

To overcome this investor skepticism, some experts say Chinese companies need to launch a public relations offensive and share details of their financials.

"Once there's a problem in the market, you need to get on the streets, pound the pavement and display that it's business as usual," said David Smith, head of corporate governance research for Asia-ex Japan at Institutional Shareholder Services in Singapore.

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"If your reporting is understandable and you're audited by a reputable accountancy firm then you've got something to hold up to investors."

On Tuesday, Muddy Waters did issue a report but it was on U.S.-listed Chinese company Spreadtrum Communications Inc. .

The size and scale of Yurun's drop is expected to attract the attention of Hong Kong regulators, some legal experts said.

"If something sells off suddenly, the (Securities and Futures Commission) SFC will have a look at who the sellers are, why they are selling and what the source of information is for that decision," said Alan Linning, a partner at Sidley Austin in Hong Kong.

"But it is difficult to track down the source of rumours," the former head of enforcement at the SFC, Hong Kong's securities watchdog, said.

The SFC was unable to comment on the recent moves in Yurun.

Shares in Zhongpin Inc. , a fellow Chinese meat processor plunged on Monday. The company did not issue any public disclosure, nor do news searches show any material information spreading.

The stock went through wild swings on huge volumes, at one point falling 18 per cent before recovering to nearly where it opened.

"Given the way the market is and the skepticism that's been building, I can only expect there are going to be more stocks sold off like this," said Todd Martin, Asia equity strategist at Société Générale.

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