We currently include a few tests although we will expand on these going forward:

1. Subsidiary Losses: We highlight companies which we suspect of recording significant losses at subsidiary companies. This can potentially be a buy or a sell signal. Tell-tale signs include rising deferred tax assets which related to operating losses and a higher than expected corporate tax rate.
2. Variable Interest Entities: We highlight companies which have Variable Interest Entity (VIE) structures. This list is not comprehensive but we aim to improve it over time. VIEs are an attempt to overcome foreign ownership rules in China. They try to tell Chinese regulators that a business is owned by Chinese, and to foreign investors that it is owned by foreigners. There is an increasing concern that they are not legal structures. For a comprehensive analysis of VIE structures and its implications, please read Paul Gillis’ comprehensive report on the subject: Accounting Matters: Variable Interest Entities in China (18 Sep 2012).
3. Reverse Mergers: Many of the overseas listed Chinese companies accused of fraud have emerged through reverse mergers, often referred to as back door listings.
4. Share Price Manipulation: This looks at the percentage of total volume which takes place on either the Bid or the Offer. If too much volume is taking place on either side, it can suggest that a company is either being manipulated up or down. It’s a minor flag as it tends to be a little unreliable and often there is a simple explanation such as there are a lot more sellers than buyers. You tend to find that companies with small free-floats raise this flag as the promotor often wants to control the share price.