Greater Financial Transparency of Chinese Stocks

“The problem is, there’s all sorts of incentives to raise money on public markets in China, and there’s no penalty for fraud. So why should you not commit fraud in order to raise more money?” Anne Stevenson-Yang, Research Director at J Capital Research

Gary Gensler, Chairman of the U.S. Security and Exchange Commission (SEC), wants greater transparency of Chinese stocks listed on U.S. exchanges. He wants the risks of investing in Chinese companies that list on U.S. exchanges and that cook their books and commit rampant fraud to be made more clear and apparent. Gensler, like many American investors, consider investing in Chinese stocks extremely risky because they don’t completely trust Chinese companies’ financial reporting.

For example, the Chinese company, Luckin Coffee, was found to be a fraud after an internal investigation revealed the fabrication of approximately $300 million in revenue. The investigation found that the fabrication of sales began in April 2019, and involved inflating costs and expenses by almost $200 million, as well as booking $300 million in false revenue.

Recently, the Senate passed a bill that could essentially ban many Chinese companies from listing their shares on U.S. exchanges, or raising money from American investors. The companies would be subject to audits by U.S. regulators for three consecutive years. If they do not comply, they would be banned from trading on the exchanges.

Anne Stevenson-Yang believes that the SEC should not wait for three consecutive years of non-compliance. Instead, she believes that this three year look will not happen expeditiously enougn to save U.S. investors from Chinese fraud and scams. She suggested that U.S. auditors should get “immediate and thorough access” to audit papers. “If they’re not given access, then the companies should immediately be delisted. Why wait three years?”

Delisting Chinese stocks on US exchanges that do not comply with US accounting and listing standards would be justify because of financial fraud or lack of transparency.

Delisting means that a Chinese company traded on an exchange like the Nasdaq would lose access to a broad pool of buyers, sellers and intermediaries. The centralization of these different market participants helps create what’s called liquidity, which in turn allows investors to quickly turn their holdings into cash.

“Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally,” said billionaire investor George Soros. “But that is a deception. Xi [Jinping] regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening. Xi’s China is not the China [foreign investors] know. He is putting in place an updated version of Mao Zedong’s party.”

References:

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