Tuesday, July 14, 2020

Calls for Scrutiny of US-Listed Chinese Companies Will Benefit Investors

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Commentary

When Chinese beverage brand Luckin Coffee admitted to fraud—wiping out $8.3 billion of value from U.S. investors’ pocketbooks—the scandal highlighted the risks of investing in Chinese companies.

In an interview with Fox Business Network last week, President Donald Trump said his administration is “looking at” Chinese companies such as Luckin that are listed on U.S. exchanges yet don’t always follow U.S. disclosure and accounting guidelines.

Investing bears risks. And investors understand that companies from emerging markets (such as China) bear an even higher risk–reward ratio, due to the less mature economy and less developed markets of their local countries.

But that’s not all with Chinese companies. There are additional risks that investors may not be aware of. While being listed on U.S. stock exchanges, Chinese companies such as Luckin aren’t held to the same accounting and disclosure standards as U.S. companies listed on those same exchanges.

There were 172 Chinese companies listed on U.S. exchanges that were valued at more than $1 trillion as of September last year, according to an annual report issued by the U.S.-China Economic and Security Review Commission.

They’re not on a level playing field with U.S. companies.

The U.S. stock market is home to companies from a multitude of industries, geographies, and financial positions. Investors’ ability to determine the fair price of a company’s stock is vital to the healthy functioning of the market. A level playing field and the integrity of market participants is paramount. That’s why the Trump administration’s investigations into Chinese companies should be a welcome development for investors.

Loopholes

As a starting point, Chinese companies should be bound by the same set of rules and guidelines as other companies listed on U.S. exchanges. But due to certain loopholes that U.S.-listed Chinese companies have exploited, they have more lax requirements compared to their American counterparts.

All U.S. companies are audited, and their auditors are professionally licensed…

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