Not-So-Brilliant: New York Stock Exchange Suspended Trading of Chinese Automaker Amid Troubling Revelations

(Washington, D.C.): In a growing scandal eerily reminiscent of that which derailed the New York listing of Bank of China earlier this year, the first Chinese company ever listed on the New York Stock Exchange (NYSE) a decade ago had trading of its stock temporarily suspended on 21 June both here and in Hong Kong. These extraordinary interventions were in response to a non-transparent, somewhat bizarre regime change at Brilliance China Automotive Holdings.

The firm’s CEO, and reportedly one of China’s wealthiest individuals, Yang Rong, was dismissed from the company the day after a corporate denial that anything was amiss in the ranks of its senior management. Rumors have swirled around Hong Kong over the past month that Mr. Yang was under investigation by Chinese authorities for “financial irregularities” — an expression that has taken on new meaning in the post-Enron era. The shadow over Brilliance has caused share value to decline over the past few weeks.

BMW Damage Limitation

Ironically, the company’s twin trading suspensions came on the cusp of an anticipated announcement of a high-profile joint venture with Germany’s BMW for the production of what a Wall Street Journal article of 21 June termed “China’s first luxury-class auto joint venture.” BMW’s spokesman appeared to backpedal with news of the suspension indicating in a New York Times article of 22 June that “the main investigation and the most important investigation we did was on the technical capability of the plant.” Presumably, this is code for rather superficial due diligence on the financial health of Brilliance.

NYSE Has Explaining To Do

What is most troubling about the unexplained nature of Mr. Yang’s departure — who personally denied to investors that he was under any type of investigation the week before the suspension — is the light that is being shed on the company’s ownership structure and the question of how it ever came to be listed on the NYSE in the first place. According to the Wall Street Journal piece, “Like many Chinese entrepreneurs, Mr. Yang operated in a nebulous zone marked by opaque dealings. When he listed Brilliance in New York, Mr. Yang implemented a complicated restructuring of the company that handed majority ownership of Brilliance to a non-profit foundation that he then controlled as Chairman but that nominally belonged to the government.” Perhaps the NYSE will look into the Chinese Financial Education Development Foundation that reportedly owns some 39-48 percent of Brilliance and is, in turn, controlled by the People’s Bank of China.

Bottom-Line

Belatedly, the Securities and Exchange Commission and NYSE may now get serious about the kind of “due diligence” needed to protect U.S. and other shareholders, particularly given the “green light” provided June 24 or 25 to resume the trading of Brilliance stock. Regrettably, such attention will come only after sharevalue has been already hit by fleet-footed and better-informed Hong Kong traders. While probing this seeming Chinese enigma, these U.S. market gatekeepers may also wish to inquire about a Forbes magazine profile depicting Mr. Yang as China’s third-richest man with some $840 million in personal net worth.

It is also long past due that the “wink and nod” approach to state-owned Chinese companies listing in the U.S. equity markets come to an abrupt end. These firms and their Chinese government sponsors should be held to the same standards of transparency, disclosure and accountability that will apply to their U.S. counterparts in the aftermath of this country’s corporate governance crisis.