The arrest of the chief executive of China Aviation Oil (中國航油), listed in Singapore, will push foreign investors to take a closer look at future Chinese share sales, analysts say.
It has once again drawn attention to the problem China has with getting modern corporate governance right, and could even motivate some investors to demand a discount when buying their shares, they argue.
"It won't fundamentally diminish the appetite of institutional investors. It doesn't change the China story," said Jamie Allen, secretary general of Asian Corporate Governance Association, a regional nonprofit organization.
"What it will do -- I hope -- is affect the way institutional investors scrutinize the companies," he said.
China Aviation Oil chief executive Chen Jiulin (陳久霖) was arrested on Wednesday -- and later released on bail -- after returning to Singapore amid investigations of losses amounting to US$550 million.
Allegations of insider trading have also been raised after China Aviation Oil's parent company cut its stake in the firm in October, 10 days after it allegedly became aware of the impending financial disaster.
It is bad news for Chinese companies eager to tap into global finance through a series of high-profile initial public offerings (IPOs).
"This issue will cause overseas investors to worry about local enterprises' ability to govern themselves," said Yu Zhiqiang, an analyst with Shenzhen New Land Investment Consulting Co. "It will affect their interest in Chinese IPOs."
Previous IPOs have regularly seen frenzied interest, culminating when China Green Holdings (中國綠色食品), a vegetable producer, sold shares in Hong Kong in January that were 1,600 times oversubscribed.
Then along comes the alleged wrongdoing of China Aviation Oil -- not some upstart led by amateurs but a bluechip that, until recently at least, had an ambition to become the country's largest integrated overseas oil company.
If one of China's most admired companies can come under suspicion of shady dealings, then what about the country's smaller and less prestigious companies, some observers have started wondering.
"The fact that such an outstanding company can end up in this kind of trouble means a lot of investors will look with less confidence at other Chinese enterprises," a futures trader told the Oriental Morning Post in Shanghai.
Market jitters would come at a bad time not just for large enterprises planning IPOs overseas, but for the government too, as it hopes to push economic reform through share sales in overseas markets.
Bank of China (中國銀行), the country's largest forex lender, is preparing what could become the mother of all Chinese IPOs next year, as is China Construction Bank (中國建設銀行), the country's third-largest lender.
"The China Aviation Oil issue is just an individual incident," said Zheng Weigang, Shanghai Securities Co (上海證券). "It doesn't mean all companies listing on securities markets are unable to prevent risk or manage themselves properly."
After all, some analysts reason, China has experienced similar sorts of embarrassment in the past, and they have soon been forgotten.
Bank of China knows what it is like to be under scrutiny for irregularities. Its former president is now behind bars, serving a 12-year prison sentence for taking huge bribes.
"China has been able to digest this sort of bad news in the past, and I believe that over time, we'll be able to digest this incident as well," said an analyst at a Chinese securities firm, who asked not to be named.