Total Fraud, Little Fraud, Big Fraud: Tinker, Tailor, Soldier, Spy
Hmmm, my opinion is that the low valuation of Chinese stocks is not completely due to fraud risk. Rather, short-term to median term growth risk plays a much bigger role.
At least, for many local Chinese investors, accounting fraud is nothing new even 20 years ago. They never take any companies' financial numbers for granted. What they like using to invest is something called "concept investing". Between 2006 and 2007, the Shanghai index jumped from 1100 to 5900. During that time, almost every company had 30+ P/E, and nobody worried about fraud. Every week, there are sections that are hot because of their concept. The market is hot because of the China growth concept.
Things changed very soon. From 2010, the concept changed. China, even in many Chinese's mind, is not longer a growth story. China became a bubble story, i.e. credit bubble, housing bubble, over supply bubble, infrastructure bubble, etc. These redlines are everywhere in China and in the Chinese's mind. From then, China's stock market soon turned into a bear market again. What makes things worse is that the government had to keep the biggest China growth engine, real estate building, shut in order to ensure political stability. Suddenly, the Chinese stock market ran out of positive concepts to long stocks.
Many Western bears started to follow their Chinese peers' path. All those negatives start to perfectly work against most Chinese stocks. (Only couple of growth concept stocks such as Baidu and Tencent performed relatively well. ) Moreover, western bears have another weapon their Chinese peers forgot to use, i.e. frauds. Suddenly, numerous frauds in Chinese stocks started to emerge. Chinese stock valuation dropped even further after this massive killing weapon.
In my opinion, the "little fraud" risk will never go away any time soon. However, once the China growth concepts become prevailing again, people will start to ignore this little risk. For now, the little fraud risk is just one another bearish every Chinese stock has to bear.