Hello,

Yes, I have seen this (Ben Wey) article.  His rationale echoes that of many others who have defended the ChinaHybrid space. But I respectfully call into question many of Ben's points.  

1. I have interviewed a handful of  CEOs who say SAIC docs are meaningful and that huge differences from SEC filings should not be the norm.

2. I have obtained filings used for SAT docs that materially differ from SEC docs.

Ben says:

There are over 50 million registered businesses in China. China's State Administration for Industry and Commerce ("SAIC") has no authority in overseeing the financials of a business in China.

It is incorrect to refer to SAIC filings as a Chinese company's "tax authority" and make accompanying accusations regarding tax evasion or derive judgment on a company's financial status. The SAIC's function is like the "Office of the Secretary of State" at the state levels in the U.S., whose primary responsibilities include business registration, issuing permits, and maintaining corporate status of a business. Here is how it works: Chinese companies are required to file annual tax returns with local tax bureaus. The same filing document is copied to the local SAIC branch office within the jurisdiction where a business is physically located. What does the SAIC office do with the documentation? It gets filed away and there is nothing more beyond that. The process is a simple formality to show that a registered business has filed its annual tax returns, which is a requirement for a business to maintain good corporate standing. In addition, SAIC has tens of thousands of branch offices across China that each provides varying lengths of information solely related to a business's registration status. There are more than 50 million registered businesses in China and all of them must register with their SAIC local branch offices before they can start doing business.

State Administration of Taxation ("SAT") is the only Chinese government agency that has the legal authority to collect corporate taxes and receives annual financial reports of a business. SAT has tens of thousands of local branch offices across China. Corporate tax reporting in China is a local event, filed by a business within the jurisdiction of an SAT office where the business is physically located. Once a business makes its tax filings, the local SAT office issues a "Certificate of Tax Completion" to the business which provides evidence that its tax filings are complete and accepted, and that the business has satisfied all of its tax and financial reporting obligations. Then a copy of such filings is provided to the SAIC office which can certify that the business is in good corporate standing. That is the very extent of the SAIC's involvement in Chinese tax filings.

My response:

He actually admits that SAT filing is copied to SAIC!!!  This supports information from my original article. So what is Ben saying here? That it gets filed and lost or is incomplete? I do not buy this.  I do not think that anyone has ever contended that the SAIC is a tax collector, but they do have tax documentation.

Ben Says:

All of the U.S. listed China based companies are under holding company structures which own multiple subsidiaries in China. Unlike the SEC, the SAT or SAIC does not require a holding company to file consolidated financial statements.

If a company is a holding company that owns multiple subsidiaries or factories that are not all located in the same physical location, then each subsidiary has to file its own tax returns separately with a local tax bureau where the subsidiary is located. Each subsidiary makes its own tax filings independently from other sister businesses as well. There is no such a thing as a consolidated tax return filed with either the SAT or SAIC at the holding company level. Therefore, for a holding company that owns multiple subsidiaries, pulling a tax return on one subsidiary certainly does not represent the holding company's financials. In the case of U.S. listed China based companies; all of them have multiple subsidiaries located in China. Until all of a holding company's subsidiaries are consolidated into one financial statement, simply adding up the financials of each subsidiary does not equate to the financials filed by the holding company, represented as an entire organization through its SEC filings.

On the other hand, a holding company's auditor reconciles tax filings, sales receipts, and other public and nonpublic financial evidence to produce SEC and U.S. GAAP required financial statements. Experienced auditors in China are well aware of this issue. Further, adjustments are made for differences between U.S. and Chinese GAAP. Thus, SEC filings are indeed the most reliable proxy for a U.S. listed company's financial performance.  

As an example, for a vertically integrated manufacturing business, it is common for subsidiaries to transfer revenues and expenses within the same organization for allocating profits to entities that are legally subject to lower tax rates or for the purpose of simply following a manufacturing production process. To avoid double counting, professional auditors consolidate all of a holding company's subsidiary financials after inter-company transactions are eliminated.  A holding company's financials are filed with the SEC only after such inter-company related transactions are eliminated. Therefore, financial reports obtained from SAIC or SAT are absolutely not correct reflection of a publicly traded holding company's financial statements.

My response:

Yes, I agree that one has to be careful when multiple subsidiaries exist and when dealing with differences with U.S. GAAP. Where I have a problem is when the summation of individual statements are drastically different from SEC. Not one accused company has shown a side by side reconciled process.

Ben says:

A company's tax filings with a local tax authority cannot be obtained by non-related third parties through legal means. By law, business tax filings are not publicly accessible.  

It would be impossible for anyone outside a business itself to have legal access to its SAT tax filings since the data is not publicly available and confidentiality is strictly preserved by the Chinese government agency. It is certainly illegal and a criminal act to trade or disperse rumors based on such nonpublic information. Many so-called China "sources", often backed by stock short sellers, tout their abilities to get purported financial reports filed with the SAT on any U.S. listed China based company. These are illegal claims. Also as discussed earlier, no consolidated financial statements exist for a holding company in China. Even if an SAIC filing is illegally obtained on a subsidiary, it does not reflect the U.S. listed holding company's consolidated financials.

My response:

I think the SEC will rule that it is more criminal for Chinese firms to defraud U.S. investors. His statement is laughable.

SAIC filings can be legally obtained, so I do not know what Ben is talking about.

Ben says:

SAIC filings have no relevance to the credibility of a company's public filings filed with the SEC

As long as a holding company structure is involved, the SAIC and SEC numbers cannot possibly match except under an extreme circumstance in which a public company has only one wholly owned operating subsidiary and there are no inter-company transactions of any sort, including expenses, different revenue recognitions under Chinese and U.S. GAAP accounting etc. at the parent company level. Presently, no such China based company exists on any U.S. stock exchange.

Any concern over SAIC filings is just one example of the many areas that investors are just beginning to learn about Chinese business practices. Be wary of less professional advice from amateur or anonymous sources that often have untold self-interest behind some seemingly legitimate arguments. There are often stock short sellers behind many "sudden discoveries of fraud" at a legitimate publicly traded China based company. Avoiding fraud involves much more than comparing apples to oranges. Understanding China, learning to speak the Chinese language, gaining

My response:

No relevance?? we shall see. But I have interviewed a handful of  CEOs who say SAIC docs  are meaningful and that huge differences from SEC filings should not be the norm.  I agree that uncovering fraud is a bigger task then just pulling SAIC and SAT files. SAIC/SAT differences can be tax fraud and not business fraud, but still a problem.  See the link on QING. http://geoinvesting.com/companies/qing_qingdao_footwear_inc/research/research/0026964