Chinese listing flops in US raise governance concerns
Companies suffer steep share-price falls while Luckin implosion highlights risks Luckin Coffee shares tumbled more than 80% after an investigation found hundreds of millions of dollars in sales last year were fabricated
A series of stock market flops by Chinese companies that have listed in the US has heightened concerns over standards of corporate governance, particularly in the wake of Luckin Coffee’s implosion last month. Shares in the 29 Chinese companies that listed on the New York Stock Exchange since the start of 2017 have fallen by an average of 16 per cent since they went public, according to Dealogic data. Non-Chinese companies listed on the exchange, meanwhile, are down less than 3 per cent over the same period. Chinese companies quoted on the tech-focused Nasdaq market have performed even worse, falling almost 29 per cent on average.
That compares with a gain of nearly 22 per cent for non-Chinese companies over the past few years on the same exchange. The poor performance of Chinese stocks underscores concerns over what has become a lucrative trade for international investment banks bringing companies to market in the US. In early March, the abrupt downfall of Luckin cast fresh doubt over the health of US-listed Chinese companies more broadly. Shares in the would-be challenger to Starbucks tumbled more than 80 per cent after an internal investigation found that hundreds of millions of dollars in sales last year were fabricated.
The scandal has galvanised longtime critics of Chinese companies’ disclosure standards, who say that headline figures can mask a host of problems. “A real company in China is allowed to invent about 30 per cent of its revenue and nobody really cares if its profits are real or not,” said Carson Block, who runs the short-selling firm Muddy Waters. “There’s just so much bullshit that reality is measured in degrees of falsity.” The alleged fraud at Luckin has also rekindled the attention of US regulators, who have often complained about the opacity of Chinese companies’ inner workings. On Tuesday, Jay Clayton, chairman of the Securities and Exchange Commission, made repeated mention of China in a warning to investors over the book-keeping standards of foreign companies listed in the US. Mr Clayton, writing with three other SEC officials and William Duhnke, chair of the Public Company Accounting Oversight Board, said that “in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading”.
The regulators also raised the PCAOB’s lack of access to the work papers underlying audits of US-listed Chinese companies, and warned that investors would have little recourse in the event fraud was uncovered. “If you cheat the foreigners it’s fine,” said Arnaud Vagner, an analyst who writes under the name Iceberg Research. Mr Vagner said even total access to audit papers would do little to prevent widespread fraud in China, so long as auditors were not punished severely when they failed to catch companies cooking their books. He also warned that more scandals could make New York’s stock exchanges less attractive to all sorts of companies from China. “There’s a risk that if there are too many of these ... frauds, the good Chinese companies will see their valuations go down”, he said. “Some will start to say ‘why are we listing here, exactly?’”