WASHINGTON — The Associated Press discovered significant discrepancies between financial records and what a Chinese company backed by U.S. banking giant Morgan Stanley reported as part of its $654 million stock offering. Issues of murky financial information and lax oversight have become increasingly important as U.S. mutual funds and pension funds invest more regularly in Chinese companies.

The disarray in Tianhe’s official story calls into question Morgan Stanley’s roles in shepherding, then promoting, then defending Tianhe – which one of the bank’s investment funds partially owns – as a major international stock offering in Hong Kong. For the bank and fellow Tianhe underwriters Bank of America Merrill Lynch and UBS AG, trouble at Tianhe could mean reputational and legal trouble.


For U.S. investors, the story of Tianhe highlights the unusual risks that can come with China’s rapidly opening markets. As investment banks bring new mainland Chinese stock offerings to market, billions of dollars of such holdings are entering U.S. investors’ portfolios through pension and mutual funds.

“Accounting fraud in the U.S. is usually from the overly aggressive application of an accounting principle,” said Paul Gillis, a professor at Peking University. “Accounting fraud in China has usually been situations where large portions of the business simply do not exist.”

Tianhe Chemicals Group Ltd. manufactures lubricants and sophisticated chemicals used to fight fires and toughen touchscreens. The AP began its review of the company after allegations arose about the firm from a shadowy investment research group tied to people betting against Tianhe’s stock. The group said the company had vastly overstated the size and profitability of its business.


Tianhe rejected the claims, and Morgan Stanley said it stands “resolutely behind Tiahne’s world-class management team,” but Tianhe’s shares have fallen 39 percent since then. Its share price rose by 6 percent Thursday.

Research in the U.S., Hong Kong, Shanghai and Tianhe’s hometown of Jinzhou over two months suggests investor concerns were warranted.

The AP largely corroborated key claims by Anonymous Analytics, the group that targeted Tianhe, and uncovered information the group did not. The discrepancies involve basic matters such as Tianhe’s profitability, relationships with customers and even the company’s origins.


Among AP’s findings:

 Tianhe revenues cited in commercial business data from government and public sources were reported as a fraction of the revenues the company reported to foreign investors, $106 million in 2012, not $684 million. The AP purchased the financial data on Tianhe’s subsidiaries from vendors who also perform due-diligence work for the U.S. Commerce Department. Tianhe disputed the accuracy of this information, and allowed the AP to review local regulatory filings reflecting the higher revenue figures.

 Commercial business data and records from a state-owned financial institution identify a Tianhe predecessor as the property of Chinese government organizations, although the company’s founders said they own it. The difference matters because the older company transferred key assets to a current Tianhe subsidiary for “nil consideration” in 2009, and China requires government property to be sold at a “reasonably determined” price. A case manager for China Great Wall Asset Management Corp., a state-owned financial institution, confirmed that the government’s records show the predecessor was state-owned as recently as late 2013.

 Tianhe’s filings indicate one principal customer, Shanghai Xidatong International Trading Co. Ltd., has bought as much as $100 million in chemicals each year. Business data purchased by AP said that company’s annual revenues in 2012 were less than $6 million, and the company’s net worth was minus $900,000 in late 2012. Shanghai Xidatong’s registered office is an unoccupied room in a dilapidated apartment building.

Only subscribers are eligible to post comments. Please subscribe or login first for digital access. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.