2. Should ADRs be added to your portfolio ?

Chinese ADRs: The Elephant in the Room

Chinese ADRs

Chinese companies, like any foreign company, also have the option of listing ADRs and many have made use of this. However, Chinese companies have an unfortunate history of fraudulent activity.

The most famous case was the post-2008 reverse merger mania. Covered in a documentary called The China Hustle, many smaller Chinese companies would list on American stock exchanges through reverse mergers, often with near-bankrupt or shell companies that were already listed.

Listing this way allowed many small Chinese firms to avoid SEC scrutiny. Their listings were often pushed by investment banks as a way for investors to get exposure to the “Chinese growth story.” The issue was that most of these small companies were faking their financial reports. What’s worse, after subsequent investigations by hedge fund short sellers and the documentary crew, it was revealed that many of these Chinese businesses weren’t active businesses at all. In fact, they were completely fraudulent.

While these companies weren’t ADRs, it set a precedent and created a certain stigma around Chinese companies. The Chinese government refused to prosecute these companies and the SEC was woefully unequipped to deal with the situation.

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