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U.S.-Traded China Stocks Not Good Enough for Hong Kong

When I first started warning about Chinese stocks that trade in the U.S. a year ago, during various hits on CBNC, the mantra was simple: Most were created through the backdoor process — reverse mergers.

And while their market caps were relatively small, in aggregate they amounted to a market value of around $30 billion.

The bigger question: Why did they wind up trading here in America, rather than closer to home—in Hong Kong?

Turns out the Hong Kong Stock Exchange wouldn’t have taken them.

Or so says Charles Li, CEO of the Hong Kong Exchanges and Clearing, which runs the Hong Kong Stock Exchange.

In a CNBC interview today, he said:

“I do understand there are quite a few Chinese companies that are into a lot of problems over here [in the U.S.], and I was looking at them and I don't really know how they ended up here—because none of those companies, or the majority of them, would not have seen the light of day in Hong Kong through our listing committee processes.”

CNBC’s Bob Pisani then asked: “Are you saying these companies would have never passed muster in Hong Kong?”

Li: “Absolutely not. Because of their profit track record and their management presence record—they wouldn't even be considered.”

CNBC’s Melissa Lee then followed up, asking: “Are regulations here too lax?”

Li: “I don't want to pass general comments, but I do think the regime is very different, because here, in the United States, it is more disclosure based. You can do whatever you want as long as you tell people the truth about it. But in our exchange, it's more prescriptive. We actually tell you have to do A,B,C in order to list.”

Moral of the story, as we now know from the controversies surrounding so many Chinese stocks: Just because it’s disclosed doesn’t mean it’s right—or even the truth.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

Follow Herb on Twitter: @herbgreenberg

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