Chinese stocks listed on US exchanges to take a battering from SEC rebuke: industry insiders
Published: Apr 25, 2020 12:14 AM

Traders work at the New York Stock Exchange (NYSE) in New York, the United States, on March 12, 2020. (Xinhua)

Chinese stocks listed on US exchanges will inevitably take a battering from the recent US regulatory rebuke, Chinese industry insiders say, noting more Chinese firms are expected to consider IPOs closer to their home market.

The US Securities and Exchange Commission (SEC) chair issued a rare warning on Chinese company disclosures earlier this week, in the wake of Starbucks rival Luckin Coffee's sales fraud scandal.

In a strongly worded statement posted Tuesday on the securities regulator's website, SEC Chairman Jay Clayton, three other SEC officials and chairman of the Public Company Accounting Oversight Board said that "in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to US domestic companies."

Clayton also told FOX Business Network on Wednesday that "We have struggled for a long time with the Public Company Oversight Board getting access to audit work papers. The Board still does not have access."

"It's a source of frustration for us because we don't have the same oversight with respect to operations in China from a financial reporting point of view that you do in most of the rest of the world," Clayton said.

The SEC chairman's remarks indisputably augur disaster for Chinese stocks traded on US exchanges, and more Chinese stocks will be affected, Wu Jinduo, head of fixed income at the research institute of Great Wall Securities in Shanghai, told the Global Times on Friday.

Clayton's warning mainly stems from Luckin Coffee's financial fraud, Wu said, noting that incomplete and untrue information disclosures or untimely disclosures are among the most avoided violations by listed firms in the US.

Luckin's Chief Operating Officer Liu Jian, and his subordinates "had engaged in certain misconduct, including fabricating certain transactions," the Chinese coffee chain said in a statement in early April, citing an ongoing internal investigation.

"Certain costs and expenses were also substantially inflated by fabricated transactions" during the aforementioned period, according to the statement.

Trading in Luckin's NASDAQ-listed stock was halted in premarket reading on April 7 and is still suspended.

True, accurate, complete and timely disclosures of listed firms are an important basis for the healthy and orderly operation of the securities market, China's securities regulator said on Friday.

"Financial fraud seriously destroys the foundation of market integrity, severely undermines market confidence, and seriously damages investors'  interests. It is a 'tumor'  in the securities market," the regulator said, vowing to make efforts to crack down on fraudulence.   

Investors making revisions to their stock exposures recently were also admonished against Chinese stocks listed in the US, which might prompt big sovereign financial institutions such as pension funds, big mutual funds and insurance investment funds to stop investing in Chinese stocks, said Wu, adding that "it can't be ruled out that [Chinese firms might be subject to] unreasonable additional disclosures and extra oversight measures by the SEC."

This might result in higher thresholds for Chinese businesses planning IPOs in the US and it is likely that some Chinese firms may have to put on hold their US IPO plans for the time being or even give them up entirely, she went on to say.

"[The remarks made by SEC chair] will definitely have an impact on Chinese stocks, but it's unlikely that they are set to be smashed down," an investment banking analyst with a Chinese joint-stock bank told the Global Times on Friday on condition of anonymity.

The analyst agreed that near-term IPO plans would be slammed and their valuations would not be as high as previously thought.

An increasing number of firms will consider shifting their IPO venues to Hong Kong or the Chinese mainland, especially the STAR Market in Shanghai, the nation's new NASDAQ-style tech board, according to the analyst.

Some US-traded Chinese stocks are also likely to return to home markets, eyeing a flotation in Hong Kong, Wu estimated.

The tougher rhetoric might also put downward pressure on Chinese stocks traded on US exchanges, compounded by concerns over another round of pain for US stocks as a whole.

In a note sent to the Global Times on Friday, ICBC International economists Cheng Shi and Qian Zhijun said the drastic swings in US stocks in March were a reflection of shock to investor confidence and as the pressure on US economic fundamentals becomes gradually evident, it is likely that US stocks will retest lows and a new round of real shock might be in the making.