This week, we speak with Carson Block, chief investment officer of Muddy Waters Capital LLC, an activist investment firm with $261 million in assets under management. Many of his shorts have fallen 50% or more, and several have gone to zero and been delisted. Block was featured in the documentary “The China Hustle.”
We discuss how very different the regulations are between the United States and China in terms of transparency, accounting, and compensation. This becomes very problematic when (non-reporting) Chinese companies are listed in U.S. markets. PBOC rules prevent China company management from cooperating with foreign investigations.
Block notes that 20% is an acceptable amount of graft and/or embezzlement in China that is tolerated “so long as the roads get built.” Their potential growth prospects can blind U.S. investors to the endemic fraud found throughout the nation’s smaller and midsized companies.
He explains how a due diligence trip on Orient Paper he did as a favor to his father, revealed the company — and other China-based companies — were Potemkin factories that were mostly empty facades. His first short consisted of a mere $2,000 in Puts in the company. When Block released his research report, the stock fell 50%. The company response — a variety of easily disprovable lies and highly dubious claims — increased Block’s convictions that the company was a fraud. His second research report on the company Rino International, sent the company into a tailspin, and it was soon after delisted.
China is an emerging market with a weak rule of law, plenty of graft and fraud, and little in terms of disclosure or transparency. Block believes that until Chinese companies are mandated to be in compliance with US regulations, they should be NOT allowed to be listed on U.S. exchanges.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
Be sure to check out our Masters in Business next week with Harindra de Silva, of Wells Fargo Asset Management. He leads the Analytic Investors group, running quantitative strategies, and managing $20 billion in client assets. He is a pioneer in low volatility and factor-based investing, and has won various CFA Institute Graham & Dodd Awards for Excellence and several Institutional Investor Bernstein Fabozzi awards.
Carson Block’s co-authored book
Doing Business in China For Dummies by Robert Collins and Carson Block
Carson Block’s favorite books
When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein