Luckin Coffee investigated by top Chinese regulator
Concern in Beijing that accounting scandal could damage other overseas listings
One of China’s most powerful regulators has opened an investigation into Luckin Coffee, the Starbucks rival that is now at the centre of an accounting scandal. The decision by the State Administration for Market Regulation underlines the concern in Beijing over the damage the scandal could do to Chinese companies seeking overseas listings, according to two people familiar with the investigation. Shares in Luckin, which vowed to displace Starbucks as the biggest coffee chain in China when it floated on Wall Street last year, have collapsed after the company disclosed at the start of this month that an internal investigation had uncovered Rmb2.2bn ($310m) in fabricated transactions. The probe by the watchdog, which has sweeping powers, adds to an existing investigation by the China Securities Regulatory Commission, the country’s top securities regulator. “The Chinese government clearly fears the bad influence Luckin might have on other companies listed in the US,” one of the people said. President Xi Jinping’s economic tsar, Vice-Premier Liu He, has made clear the need to discourage illegal actions when domestic companies list abroad. In the past, Chinese regulators have often ignored transgressions of companies whose operations are almost entirely in China but are registered in the Cayman Islands or other tax havens and are listed abroad. Following Luckin’s disclosure, investors are already looking more closely at Chinese companies listed on Wall Street. The State Administration “is the right agency to look into all these allegations, since the alleged fraud took place in China”, said one Hong Kong-based lawyer. “And to damage the reputation of China overseas can also be considered a crime.” While in most cases, any arrests would happen only after police were given evidence, that agency could “detain” individuals if it establishes fraud, which is defined broadly in China, the lawyer added. Earlier this month Luckin said that the internal investigation by a special committee, which has retained US law firm Kirkland & Ellis as outside counsel, would report further findings from its probe. Lawyers say that while Beijing will want to contain any damage from the Luckin scandal, co-operation between Chinese and US regulators may be limited. In a short statement on Monday, Luckin said that it was “actively co-operating with the market supervision department to understand the Luckin operation”.