Chinese companies often encounter hurdles getting their shares listed in the US, due to cultural and regulatory conflicts. Incidences of irregularities and outright fraud don’t help, either. China just can’t seem to shake the occasional business scandal that unnerves investors.

Events this week are the latest case in point.

A US Securities and Exchange Commission (SEC) administrative judge yesterday ruled that the Chinese joint ventures of the “Big Four” major global auditing firms should be banned from working for any US-listed Chinese companies for six months. The judge found that the four—Ernest & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian—had all engaged in deceptive accounting that violated the Sarbanes-Oxley Act.

However, you can rest easy over our China-based portfolio recommendations, such as AutoNavi Holdings (NSDQ: AMAP), China Petroleum & Chemical (NYSE: SNP) or Mindray Medical International (NYSE: MR). These major companies should remain untouched by the ruling.

The ban on the Big Four doesn’t come into immediate effect; they have 21 days to file an appeal with the SEC and, of course, all announced that they would. If that appeal is denied, the issue can be taken before the US Court of Appeals.

Many investors had incorrectly assumed that these sorts of problems in China had been put to rest. Indeed, the SEC and Chinese regulators came to an agreement in May that facilitated information sharing among their respective agencies.

Regardless, the stakes involved in this week’s ruling are momentous. It’s estimated that the US-listed clients of the Big Four have a combined market value of about $464 billion. If the ban is upheld and ultimately comes into effect, it would be extremely disruptive to the Big Four’s Chinese book of business.

Those Chinese companies affected would be forced to bring in new auditors, a complicated and protracted process that involves combing through past reports to set up for future ones. To be sure, about 100 other auditing firms aren’t barred from doing business with the Chinese, but they don’t even begin to approach the scale of the major global players and lack the resources to quickly accomplish a changeover.

Given the economic value of the auditing contracts involved, all four of the accounting firms can be counted on to pursue every judicial option available and will likely keep the ban tied up in the courts for years. In the meantime, American and Chinese regulators are on track to reach a broader agreement on regulatory cooperation, which would make the entire matter moot.

It certainly wouldn’t serve Chinese purposes to get locked out of the US markets. The US is the world’s biggest capital market, representing an important source of cash for Chinese companies. A US listing also adds legitimacy to a company, giving it significant reputational value.

For now, the ultimate impact of the SEC ruling will be an additional disclosure in prospectuses, but it does up the ante in the long running diplomatic battle between the US and China. Rather than punishing investors, American regulators seem intent on getting the attention of their counterparts in China.

We remain optimistic that this issue will be resolved and investors will weather this latest scandal. Don’t overreact to the headlines and stay the course. Yesterday’s SEC ruling is a shot across China’s bow, not a shot at your portfolio.

Portfolio Updates

Unilever (NYSE: UN), one of the world’s largest consumer products companies, reported global sales growth of 4.3 percent in 2013, down from 6.9 percent in 2012 and the first year that growth has slowed since 2009. Revenue for the year totaled EUR49.8 billion.

Slow growth in emerging markets and currency depreciation played a significant role in the slowdown, as did the fact that a more positive economic environment in the developed world has yet to translate into stronger sales. Underlying sales, which excludes currency movements, in emerging markets were up 8.4 percent, while those in the developed world declined by 1.7 percent, largely thanks to the stronger euro.

Despite the drop in sales, net profit for the year was up 9 percent to EUR5.3 billion while cost controls helped boost operating margin to 15.1 percent from 13.6 percent in 2013. Free cash flow of EUR3.9 billion amounts to 7.8 percent of last year’s sales. Earnings per share (EPS) came in at EUR1.58, up 3.1 percent from last year’s EUR1.53.

Despite this slower growth, Unilever’s results were still better than expected, with earnings beating estimates by a penny. The company’s growth outlook is also improving as Europe emerges from recession, the US continues to grow and emerging market economies stabilize. Investors were actually cheered by the news and shares are up by nearly 5 percent since the announcement.

With a better year ahead, Unilever is still a buy up to 46.

Freeport McMoRan Cooper & Gold’s (NYSE: FCX) fourth-quarter net income of $707 million (68 cents per share) was well shy of the $743 million posted in the prior year, but the company reported an operationally strong quarter. Copper sales rose 17 percent versus last year to 1.14 billion pounds while gold sales were up from 254,000 ounces to 512,000 ounces.

Expenses also showed a marked decline, as the average cost per pound of copper fell from $1.54 last year to $1.16 and the average cost of gold fell 26 percent to $1,273.43 per ounce.
But there is an overhang on Freeport McMoRan shares, as the company continues to wait for export approvals from the Indonesian government. The company’s flagship Grasberg mine is located in Indonesia and it is the company’s largest producer by revenue.

The Indonesian government began phasing in new commodity export regulations on January 1, including at 25 percent tax on semi-processed copper ore. Under Freeport’s original contract of work when it first began developing the Grasberg mine decades ago, the company should be exempt from the new taxes. Until the conflict is resolved and export permits are issued, the company is deferring about 40 million pounds of copper and 80,000 ounces of gold production a month at the facility.

Freeport believes an agreement will be reached and most analysts concur with that assessment, with the Indonesian government covertly seeking a tactful way to back down. Freeport is no stranger to these sorts of conflicts with the Indonesian government and they have always been resolved favorably in years past.

Based on that assumption, Freeport stuck to its sales guidance of 4.4 billion pounds of copper and 1.7 million ounces of gold for this year.

Management also said that it is continuing to review its assets for potential dispositions or acquisitions and will continue to diversify into oil and natural gas.

Freeport McMoRan Copper & Gold remains a buy up to 42.

Remaining Portfolio Earnings Announcements Scheduled in January:

Chungwa Telecom (NYSE: CHT) – Q4 – 1/29
Banco Bradesco (NYSE: BBD) – Q4 – 1/30
Daiwa Securities Group (Tokyo: 8601) – Q3 2014 – 1/31