Zoomlion, Press Crackdowns and China’s Economy; Criminalizing business journalism damages investor confidence

Zoomlion, Press Crackdowns and China’s Economy

Criminalizing business journalism damages investor confidence.

Updated Oct. 29, 2013 5:04 p.m. ET

Beijing’s ongoing crackdown on media freedom is bad enough in political terms. But the case of Chen Yongzhou, the latest reporter to run afoul of the police, highlights the extent to which it’s also an economic problem. Mr. Chen was arrested October 18 in connection with his reporting on alleged financial shenanigans at construction-equipment manufacturer Zoomlion. Mr. Chen’s articles in the Guangzhou-based New Express newspaper claimed that Zoomlion forged various financial documents to conceal accounting improprieties and may also have been involved in the “loss”—to use state television’s word—of government property. Zoomlion has consistently denied these allegations.Then on Saturday, state-run China Central Television broadcast a tape of Mr. Chen confessing to police that he made it all up. He said he received bribes from an unspecified party in exchange for filing the negative stories about Zoomlion. However, Chinese political analysts have voiced suspicions that this story was coerced.

This is an important media-freedom case. New Express took the unusual step last week of calling for Mr. Chen’s release on its front page on two separate days. Although the paper on Sunday issued an apology for Mr. Chen’s reports, its small type and placement on a bottom corner of page one hinted that the editors’ personal views on the case haven’t changed.

It’s troubling enough that Chinese authorities broadcast an alleged confession before Mr. Chen has been formally charged with a crime, let alone put on trial. Worse is that the police are criminalizing what might otherwise have been a purely civil matter. If Mr. Chen defamed Zoomlion, that is grounds for a lawsuit by Zoomlion against Mr. Chen and New Express.

But Zoomlion is no ordinary subject of probing journalism, which is why this case is also an important economic story. The firm, which has shares listed in Shenzhen and Hong Kong, is 16% owned by the Hunan provincial government. That makes allegations that the company might have been involved in misuse of government property noteworthy. Many of the allegations contained in Mr. Chen’s reporting mirror scandals at other listed Chinese firms in recent years.

For instance, Mr. Chen and other analysts noted that a large proportion of Zoomlion’s cash flow comes from selling its accounts receivable to banks at a discount. This suggests the company may be having trouble finding customers who are able to pay their bills, which would be consistent with the slowing pace of Chinese economic growth. One reason Mr. Chen’s reports of a large fraud seemed plausible to many observers is that other Chinese firms facing similar stresses have resorted to cooking the books.

Improved transparency is the best way for both companies and investors to sort through all this. If, as Zoomlion says and analysts believe, the company’s accounting is above board, it would have an interest in suing Mr. Chen and allowing the truth to out in an open courtroom.

A heavy-handed police response creates an impression that the company has something to hide. Zoomlion’s stock price mostly weathered Mr. Chen’s original reports, but fell more than 9% after Mr. Chen’s arrest, evidently because investors thought it was part of a cover-up. The stock recovered only after his confession, which may explain why the authorities broadcast it.

Even if Mr. Chen was wrong about Zoomlion, persecution of the press is bad for the Chinese economy. A healthy capital market can function only if investors can obtain accurate information about companies. Cases like Mr. Chen’s that show the authorities might be willing to suppress bad news about a company harm China’s ambitions for a healthy domestic financial market.