Chinese Reverse Mergers: Should You Be Concerned with Them?

It has been a brutal few weeks for some of the smaller Chinese stocks, especially those that listed on the U.S. exchanges via the reverse merger route. Should you be concerned? It has been a brutal few weeks for some of the smaller Chinese stocks, especially those that listed on the U.S. exchanges via the reverse merger route.

Should you be concerned? Yes. But should you immediately go out and dump your small-cap Chinese stocks? No.

The reverse merger scene, which has been in the shadow of IPOs, is beginning to become headline news. The sad part is that many good and legit Chinese stocks are getting hammered.

While I’m sure some of you own these stocks, I do not advise a fire sale. Hang tight; yet, at the same time, make sure you look deeper into the matter and see if there are any lawsuits or allegations against the company you own.

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When you trade micro-cap stocks or small-cap stocks, there is added risk; but when you trade small Chinese stocks, there is even more risk given the Chinese environment and regulations.

The onslaught on Chinese stocks via reverse takeovers continues, as the U.S. Securities and Exchange Commission announced that it would investigate all of these companies. Over 150 Chinese reverse-merger companies have set up shop in the U.S. since 2007.

The most common allegations include misrepresentation in the financial statements and wrongdoings in business dealings. Some are warranted, such as with pollution solutions company RINO International Corporation (RINO.PK), which was delisted by the NASDAQ to the world of Pink Sheets. Not a good situation here; RINO at $1.75 is way down from its 52-week high of $20.68.

As I had mentioned recently, there are numerous Chinese companies facing delisting.

We are seeing the halting of reports, CFOs resigning, and new auditors coming in. The trustworthiness of small Chinese stocks is negative at this point.

I’m not saying all of these Chinese reverse mergers should be the subject of investigation, but since this strategy is the easiest method of listing on domestic exchanges, I’m not surprised to hear of the wrongdoings in this area.

I have covered many of these stocks based on what I believe were factual results and information. You cannot always differentiate the good information from bad. When a sole short seller attacks a company, you have to take a step back and wonder.

The way I see it is that you should be careful here. There are some suspicious companies, but I feel that the majority of Chinese companies are legit, even those that formed via reverse mergers.

While there are problem companies, many of these Chinese stocks are unfairly being dumped upon. I suggest you take the opportunity to buy on weakness, unless there are numerous allegations against the company, especially from reputable sources.