As the world bears the massive cost of the Chinese regime’s lack of transparency in its handling of the virus, public health is not the only area that the Chinese Communist Party’s (CCP) secrecy is causing real pain.
On Tuesday, U.S. stock regulators called out China for not giving them the information gathered during audits of their U.S.-listed companies, putting investors at risk.
On April 2, Nasdaq-listed Luckin Coffee, China’s biggest coffee chain, said it had fabricated 40 percent of its annual sales.
Its share price fell 80 percent the following day.
Luckin was once considered a miracle company.
It was less than two years old when it filed its initial public offering (IPO) in the United States in 2019 and raised over 600 million dollars.
In February, when Muddy Waters Research published a report calling the coffee chain a fraud and a “fundamentally broken business,” Luckin dismissed the claims, calling them “misleading and false allegations.”
But the company did eventually admit to its wrongdoings, although unapologetically.
U.S.-listed Chinese companies have a history of fraud and a lack of transparency.
In 2011, over 50 Chinese companies were delisted from the Nasdaq after a massive fraud bust. Billions of dollars in market capitalization were lost.
If a Chinese company wants to go public in the United States, they need to be sponsored by Wall Street’s investment banks. The banks normally charge a fee of 3 to 7 percent of the money raised. They also need an auditor registered in the United States.
Luckin coffee’s banks are Morgan Stanley and Credit Suisse. According to a Financial Times report, its auditor is the Chinese arm of Ernst & Young, one of the Big Four international accounting firms. The banks and auditors that sponsor Chinese companies tend to be the top firms in the profession, but that doesn’t prevent things from going wrong.
The system itself also has loopholes.
China is one of the few countries that doesn’t allow U.S. regulators to see their audit books. The regime claims the books are “national secrets” and cannot be shared with outside parties.
During a 2015 fraud investigation, U.S. regulators asked for audit records for nine Chinese companies but The Big Four accounting firms refused to turn them over.
The accounting firms later paid $500,000 each to settle the dispute. But regulators say there are still significant obstacles to inspecting Chinese companies.
Many of the U.S.-listed Chinese companies are not regular privately-owned businesses, they’re either state-owned or have close ties with the CCP.
Among the five most valuable of those companies, three are energy or finance companies owned by the Chinese regime.
Even the founder of the the privately-owned Alibaba, Jack Ma, is a card-carrying Communist Party Member who has vowed to “happily hand over all of his businesses to the party if he were asked to do so.”
According to a New York Times report, one winner in Alibaba’s lucrative New York IPO was Boyu Capital, a private equity firm founded by a grandson of former Communist leader Jiang Zemin.
Chinese fugitive billionaire Guo Wengui once said that the top ten Chinese companies, including the supposedly privately-owned Huawei, Alibaba, and Tencent, are in fact “militarized state-owned enterprises” controlled by the Jiang family.
These are the types of companies taking cash from U.S. investors without proper disclosure.
In February 2019, there were 156 Chinese companies listed on the major three U.S. exchanges, with a total market capitalization of $1.2 trillion.
The overnight implosion of Luckin Coffee is not the end of the story.
A market expert wrote that this is a “painful reminder of ‘the extreme fraud risk’ posed by some China-based companies.”
Last year, the media reported that the Trump administration is considering delisting Chinese firms from U.S. markets. In a separate move, Sen. Marco Rubio (R-Fla.) introduced a bill last year that would de-list Chinese companies that do not comply with American laws.
But so far, there is no indication of if or when that will happen.