Imagine you’re a Chinese business and you want to enter the US market. Let’s also pretend that it’s around 2008 and the US stock market has just crashed thanks to the subprime mortgage crisis. Your country, on the other hand, is experiencing an economic miracle seemingly impervious to America’s financial woes. You want American investors. American investors want you. The only problem: Americans aren’t legally allowed to directly invest in Chinese companies. So what now?
Here’s what you do: a reverse merger. What’s a reverse merger? It’s when a foreign company merges with a long defunct American company that, while no longer in business, still legally exists. For this example, let’s say that the defunct American company in question is a nineteenth century mining corporation that went bankrupt when the Gold Rush busted. But everyone wants a piece of your sweet Chinese stock options, so everyone looks the other way as you merge with this century-dead company. Suddenly, you’re legally American! You can go public on the American stock market! Everyone wins!
If it sounds too good to be true, it’s because this was the method by which around 400 Chinese companies infiltrated the American stock market, defrauded countless investors, and ran off with billions of dollars that belonged to retirees, blue collar janes and joes, and small investors. In the process of reverse merging, the companies would grossly overestimate (read: blatantly lie) about their earnings and average growth. By the time anybody figured out these companies were lying, it was too late: they’d absconded with all their investors’ money behind the Red Curtain where financial authorities and regulators couldn’t touch them. The worst part? Many powerful American companies—investment banks, firms, credit rating agencies—were totally complicit.
It is this cataclysmic scam that Jed Rothstein’s The China Hustle seeks to unravel, explain, and expose. If at times it feels like one Margot-Robbie-in-a-bubblebath away from being an unofficial sequel to Adam McKay’s The Big Short (2015), it’s because the film makes no qualms in declaring the Chinese reverse merger scheme the greatest financial crisis since the aforementioned subprime mortgage crisis. And much like that film, the “heroes” in this one are also short investors—people who bet against companies failing. Though he insists he’s not a good guy, the most heroic person to emerge from this story is Dan David, the co-founder of GEO Investing, a company devoted to shorting investment firms that promote fraudulent Chinese stocks. Having grown up in Flint, Michigan, he saw firsthand the tangible effect white collar crime can have on innocent communities. Among his methods are hiring overseas Chinese agents to physically investigate the companies participating in reverse mergers. Any of the example cases given could be made into a spy thriller: a paper company that boasted making tens of millions of dollars that only had one ratty factory full of broken equipment, soaked raw materials, and a trash heap of moldy cardboard they listed as being worth $5 million; a trucking company with only 40 employees and one driver who claimed to have a whole fleet of trucks that occupied a cavernously empty facility that only turned their water and lights on when foreign investors came by. The kicker: all of this on-the-ground investigating was highly illegal. When one of David’s agents got caught, they had to send another undercover agent to record video footage of complicit, corrupt cops so they could blackmail the first agent out of prison.
It’s impossible to watch The China Hustle without feeling a mixture of incredulous outrage and fury at all the corruption, all the complicity, all the injustice. But it’s also impossible to watch without feeling a deep-seated sense of panic. The film suggests that China may never be able to fully integrate into the world economy, as their deeply ingrained tradition of guanxi—a system of informal social networks that help promote business and personal relationships, even and especially ones outside the law—is largely incompatible with the (relatively) regulated world of international finance. And as long as the Chinese Communist government is complicit in their companies ripping off trillions of dollars of foreign capital—and why on earth would they not be?—the global economy seems poised for a disastrous showdown and collapse that could make even the Great Depression seem quaint in comparison. And it seems it’s already started. When Chinese e-commerce giant Alibaba went public in September 2014, their initial public offering (IPO) was the highest in history. Four years later their accounting practices were being investigated by the U.S. Securities and Exchange Commission—at least until President Trump nominated Alibaba’s IPO advisor to lead the exact same regulatory agency. What they’re up to now is anyone’s guess. All the world market can do now is brace itself.
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