Chinese Growth Becomes a Tougher Sell on Wall Street
Accounting fraud highlights corporate-governance concerns
After two accounting scandals in less than a week, the Chinese growth story will likely become a tougher sell on U.S. stock markets.
New York-listed Chinese tutoring company TAL Education Group said Tuesday that an employee had forged contracts to inflate sales. The news came just five days after Luckin Coffee Inc., listed on Nasdaq, said much of its revenue last year was fabricated by some of its staff, which triggered an 83% collapse in the Chinese coffee chain’s share price.
The scale of the fraud at TAL, which was discovered in a routine internal audit, seems much smaller. Its “Light Class” segment, which provides live-streamed lessons to schoolchildren and where the sales were made up, accounted for just 3% to 4% of its estimated revenue for the fiscal year through February. Its stock dropped 6.7% on Wednesday.
The economic emergency stop prompted by the coronavirus pandemic probably has helped bring these incidents to light. The plunge in revenue and difficulties in getting funding may have made covering financial holes harder. More scandals will likely surface as the downturn drags on, especially as the yearslong bull market made investors complacent about burning money to achieve unprofitable growth.
The scandals will also put the spotlight back on the longstanding corporate-governance problems of U.S.-listed Chinese companies. Their audits aren’t subject to U.S. inspections because China doesn’t allow it, and the legal recourse for investors could be limited. Given how difficult and costly it is to conduct proper due diligence, investors may choose to keep their distance, especially from the smaller stocks.
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