Chinese Media Exposed For Corporate Undermining

China Business News accused of false reporting

Major news items involving shenanigans at 2 of China’s top financial media are shining a spotlight on a phenomenon that doesn’t get much coverage in the west, but which is quite common in China and can often wreak havoc on companies’ stock prices. In one case, police have detained 2 top editors at the 21st Century Business Herald, one of China’s most respected financial newspapers, following an extortion scandal at the company’s website. In the other, leading instant noodle maker Master Kong, owned by Hong Kong-listed Tingyi (HKEx: 322), says it is preparing to sue the similarly prestigious China Business News for false reports that damaged its business.

As a regular reader of the Chinese media and author of a book on the subject, I’m quite familiar with the kinds of shenanigans that go on behind the scenes at many publications. Typical cases often see reporters and editors threaten companies with negative coverage unless they buy advertising. Similarly, many publications often promise positive coverage for companies that pay “fees” for such reporting. The situation is only becoming worse as many traditional Chinese media rapidly lose business to new media, paralleling a similar trend in the west.

I often rely on traditional media reports for many of the commentaries I write, which has become a tricky business due to all the false reporting. Generally speaking reports from 21st Century Business Herald and China Business News are considered reliable and less prone to the kinds of manipulation I’ve mentioned above. But these latest 2 cases show that even the big prestigious publications are increasingly participating in such games.

The 21st Century Business Herald case first popped into the headlines early this month, when Shanghai police raided the offices of the company’s website and detained a number of its employees, including its top editors. (previous post) It accused the group of seeking fees from publicly traded companies in exchange for positive coverage. Companies that refused to pay were threatened with negative coverage.

Now media are reporting that the investigation of is moving beyond the website and to the 21st Century Business Herald’s top editors themselves, who are based at the group’s headquarters in southern Guangdong province. (English article) The newspaper’s chief editor Shen Hao and general manager Chen Dongyang were both detained on Thursday, according to the official Xinhua news agency. There’s no additional information on the case, but obviously investigators suspect top newspaper editors were aware of and even orchestrating the shenanigans at the Shanghai-based website.

In an unrelated but similar report, media are saying that instant noodle giant Master Kong is preparing to sue Shanghai-based China Business News for false reporting, seeking 100 million yuan ($16 million) in damages and a formal apology. (Chinese article) The China Business News story appeared on September 15, and raised questions about the safety of Master Kong’s products — a sensitive issue in a country where food safety scandals have abounded in recent years.

Reflecting just how potent such negative reports can be, shares of Master Kong parent Tingyi dropped more than 7 percent in the 4 trading days after the story came out, wiping out about $1 billion in market value. The shares have since regained most of those losses, though that won’t be much consolation for anyone who sold Tingyi shares during the earlier sell-off.

So, what’s the moral of these 2 particular stories? The most obvious answer is that stock buyers should always be slightly skeptical when they read negative stories about publicly traded companies in the Chinese media. Similar skepticism may also be warranted when reading overly positive stories. At the end of the day there’s not much that investors can really do to protect themselves from this risk, which is becoming an increasingly important element to consider when trading in Chinese stocks.

Bottom line: Bribery scandals at 2 of China’s major financial publications reflect the growing risk of deliberately inaccurate reporting from the nation’s media, posing a growing risk for investors.

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