About 200 Chinese firms are at risk of getting kicked off the Nasdaq and NYSE

[Hamartia Antidote]

About 200 Chinese firms are at risk of getting kicked off the Nasdaq and NYSE

The companies must let American regulators inspect their financial audits, a fight that stretches over 20 years.

www.marketplace.org

In late 2017, a Chinese upstart called Luckin Coffee entered what was mostly a luxury sector in China. Starbucks stores in mainland China were prestigious and pricey, but Luckin offered cheaper coffee. Its selling point was that customers could order and pay through its app.

A 2018 report by state-run broadcaster CGTNdescribed Luckin’s “cashless coffee” as a refreshing addition to the market. The reporter demonstrated how she could get delivery to her office in 15 minutes, even for just one iced latte.

Back then, Luckin was seen as a high-tech Starbucks killer, and it appealed to American investors, including Seattle native Owen Sun.

“Being around Starbucks my whole life, I was intrigued [by how different Luckin was],” Sun said. “[Luckin] was very delivery-focused, didn’t have huge stores that they had to maintain with high overhead costs.”

Luckin’s approach also fit the overall trend in China toward mobile payment and cheap deliveries.

“It seemed like that was the direction that everything was going in,” Sun said.

He was among the first to buy shares in Luckin when it listed on the Nasdaq in 2019. He lost almost all of his investment after Luckin admitted to faking more than $300 million in sales. The company was fined $180 million by the Securities and Exchange Commission and was forced to delist from the Nasdaq.

The Luckin fraud reignited a long-standing battle for U.S. regulators to access the financial audits of U.S.-listed Chinese firms. Congress has added to that pressure by passing the Holding Foreign Companies Accountable Act, which stipulates that firms cannot trade on U.S. exchanges if they do not comply with the country’s audit rules three years in a row. This gives some 200 Chinese companies until 2024 to comply or delist. U.S. and Chinese regulators are currently in negotiations.

Allegations of fraud against U.S.-listed Chinese firms stretch back to the 2000s, when private firms from China began listing on U.S. stock exchanges, according to Paul Gillis, an accounting professor at Peking University’s Guanghua’s School of Management in Beijing.

“Some of them were just outright frauds, and the short sellers attacked these companies in the mid-2000s and had great success at bringing them down,” Gillis said. “That got the attention of U.S. regulators who wanted to try to protect investors by stopping that fraud.”