Lots of investors have been pouring into the Chinese stocks in the last few years. Heck, I too have been sucked into the a love affair with them.

Who doesn’t like the story?

China is growing at over 10% a year. The middle class is expanding. Their economy is expected to surpass the U.S. economy in like 20 years. Most of the Chinese don’t even have basic things Americans take for granted- like toasters. What happens when they all buy televisions, microwaves and IKEA furniture?

Compared to other emerging market countries- there are lots of Chinese companies that are trading on the NYSE. In the last year, revenue was soaring at many of them. It seemed like easy money.

But in recent months, some cracks have started appearing with some companies.

China Green Agriculture (CGA), an organic fertilizer company, is the subject of a class action shareholder lawsuit that is alleging accounting irregularities. Never good. The stock has plunged from $18 to $8.

Fuqi International (FUQI), a jewelry retailer, is in the process of restating its revenue from last year. It has not filed the appropriate 10-Q filings in about a year. The company has received several non-compliance notices from the NASDAQ. Why hasn’t it been de-listed yet? I don’t get it.

Shares have fallen from $18 to $6 but if it’s delisted- look out below. But the bigger question is, do you really want to own a company that can’t fix it’s accounting in over a year? If it can’t even do that- how’s the rest of the company being run? Remember, as a shareholder, you are an owner. Do you want to own a company like that?

Rino International (RINO) is the latest edition to the “what the heck is going on” club. RINO provides water treatment for steel companies. It is subject to an analyst report that alleges some of its customers are fake. On Nov 17, the stock was halted, the earnings conference call cancelled and the company hasn’t responded to any questions since (from reporters, analysts or anybody.)

Shares have been halted for nearly 2 days and the NASDAQ doesn’t seem to know when, or if, shares will resume trading. According to Barron’s, the company itself has asked for the halt (not the NASDAQ). Bizarre!

The stock had plunged 17% into the halting of trading and is now trading at $6. When it does re-open, look out below!

Again, as a company owner, is THIS what you want to own? There are just too many great companies to own shares in. It’s not worth it.

Little Transparency With Chinese Companies
Many of the smaller Chinese companies really have little transparency. Very few analysts cover these companies. Those that do- seem to do so from afar making it nearly impossible to actually verify the information in the earnings press releases. And I believe many of them should not even be public at all. They are too small and too unsophisticated to deal with the rigors required from the SEC to be a listed company. That’s just my opinion.

I saw a story recently that was talking about a Chinese company that ran upscale spas and exercise clubs. Sounds intriguing, right? In a country with an expanding middle class? But further investigation showed that it owned 4 spas. That’s it. FOUR! And they were thinking of an IPO. Really???

Be Careful With China
There are still ways to invest in China that might soften the blow if a particular company has a meltdown.

You can buy the Small Cap China ETF (HAO). At least that gives you a basket of all the companies.

But otherwise, buyer beware. It’s like the wild west out there. While there are lots of opportunities with China- all investors should do their due diligence.