Risky Chinese Stocks

Hot little Chinese companies use "reverse mergers" to gain listings on Amex or Nasdaq. They may generate great numbers, thanks to U.S. auditors who outsource their work or look the other way. Hence this advice from The New Yorker's James Surowiecki: Don't Enter the Dragon.

[I]nvestors in small Chinese stocks today are very much like the foreigners who poured money into U.S. railroads in the nineteenth century. Then investors anxious to cash in on the railway boom proved to be easy targets for self-dealers and outright swindlers, and foreigners in particular struggled to get good information about what was happening to their investments. *** Yet, because the railways offered—and sometimes delivered—the prospect of enormous wealth, the money kept flowing. Today, the same is true. China’s boom is real enough, and so it’s possible for investors in small Chinese stocks to believe that they’re heeding Deng Xiaoping’s famous admonition “To get rich is glorious.” Unfortunately, many of them are just proving the truth of another famous adage: “There’s a sucker born every minute.”