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I Just finished watching 'The China Hustle' and I am totally stunned.
There were hundreds of Chinese companies listed in US Stock exchanges were actually shell companies or they showed their revenue/profits 10x more than actual figures. They entered into the US market by 'Reverse Merger' process. You will argue what about the Audits or SEC. Most of them were also duly audited by Chinese auditors and the most shocking thing about china is, In China It's not illegal to steal from foreign investors. If a company releases false information about its financial report in the US market then Chinese domestic regularity authorities have no power to punish it. Of the approximately 400 Chinese companies that came to market during the 'Reverse Merger' boom, only one CEO was sent to jail. The documentary has articulated everything in a best manner.
Today, over 100 Chinese companies trade on US Stock Exchanges with combined market capital of more than $1.1 trillion. Then why on earth, US will be willing to delist them? Most of the US citizens must have been invested their lifetime savings in these companies for capital appreciation.
The reason may be the infamous 'Trade War' or the recent economic and health deterioration due to China originated Virus. This time, the widening tension between the U.S. and China involves audits of public companies.
The Current Scenario
In US, a bill that sailed through the Senate and is under consideration in the House could force major Chinese companies to stop trading their shares on U.S. bourses such as the New York Stock Exchange and Nasdaq. US force greater disclosure by non-American companies that sell shares on U.S. exchanges. Specifically, public companies with foreign accounting firms would be banned from America’s equity markets unless the U.S. Public Company Accounting Oversight Board is granted access to review their audits. Those companies would also have to confirm that they’re not owned or controlled by a foreign government.
Chinese regulators say it would hurt both countries. Chinese companies traded in the U.S. have about $8 billion of those stocks change hands every day on average, according to Goldman Sachs.
A report counted at least 11 Chinese companies listed on major U.S. exchanges that were at least 30% state-owned.
Chinese firms claim say they can’t comply to this rule because Chinese national security law prohibits them from turning over audit papers to U.S. regulators as the documents may contain medical bills, purchase records, or other sensitive material, then it’s a state secret by definition. This is something China isn't willing to disclose to any outsider.
Last month, an investigation revealed that the coffee-chain Luckin Coffee had been fabricating a bulk of its transactions. Soon after, it’s share price crashed 75% .
Chinese officials are not so worried about this as they say “Our fundamental judgment is that if it is a good company, there are so many options for listing, and it is not limited to the United States".
If the House clears the Senate measure and President Donald Trump signs it, it will become a Law, and then what will happen? No body knows! But generally a company would be delisted only after three consecutive years of non-compliance with audit inspections.
So, have you invested in the Chinese companies listed in US?
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Research Analyst (SEBI Regd.)
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