Chinese stocks in US hit as brokers wary of lending

Chinese stocks listed in the United States took a beating on Wednesday as brokers raised red flags about trading risks following a series of accounting scandals that have afflicted the sector.

Interactive Brokers Group Inc sounded the loudest alarm on the companies on Tuesday, as it prohibited clients from borrowing money to take leveraged positions on 160 Chinese securities due to numerous allegations of fraud.
Discount brokerage TD Ameritrade also said on Wednesday it is closely monitoring US-listed shares of Chinese companies.
"All these names are dangerous and it is probably the responsible thing to do to show investors, 'Listen, you can buy them, no problem, you just can't buy them on margin,'" said Andrew Left, an investor who runs Citron Research and who has published reports recommending short sales on certain Chinese stocks.
Many of the biggest losers on US exchanges on Wednesday were Chinese companies included on Interactive's list.
The New York-traded shares of Chinese real estate service provider Syswin Inc tumbled 23.1% to USD 4 and online video company Ku6 Media Co Ltd lost 9.7% to USD 3.18. Orsus Xelent Technologies Inc, a designer and distributor of cellular phones, dropped 13.5% to USD 1.99.
However, well-known bigger companies not on the list, such as Renren Inc, were also hit. Renren lost 13.6% to close at USD 10.51.
In a further sign of the accounting doubts surrounding some of the new Chinese listings, Taomee Holdings Limited said in a regulatory filing for its IPO that its auditors found major gaps in its internal controls.
The heightened concern among investors comes in part after allegations leveled against Sino-Forest Corp. Its shares plummeted after a report last week from researcher Muddy Waters accused the forest plantation company of fraud.
"Given the fact that these (Chinese stocks) have a black eye, to get a bit of negative news like that, it exacerbates the selling," said Bill Fleckenstein, president of Fleckenstein Capital Inc in Seattle.
If a broker has lent money to an investor to buy a stock and that stock falls dramatically or is delisted, the lender risks losing money.
TD Ameritrade currently does not have any new rules or regulations for investors wanting to invest in US-listed shares of Chinese companies, a spokeswoman said.
"If we see a need to make any changes in the interest of our clients, we will do so," said spokeswoman Kim Hillyer.
A Wells Fargo spokesman said "many of these Chinese companies" were on the firm's "special situations" list of companies, for which purchases on margin are either restricted or prohibited.
UBS Wealth Management Americas spokeswoman Karina Byrne said the firm has not changed its policy. The brokerage's securities-backed lending unit subjects all securities to a review to determine their applicable lending value.
"Chinese stocks such as the ones you mentioned would fail for lending value at UBS due to volume or market cap," she said.
"The question is, 'What can the brokerage firms do to make sure people don't get burned?' said Left. "Putting up 100% is good."
Bank of America's Merrill Lynch unit and Morgan Stanley Smith Barney, both large retail brokerage firms, declined to comment.