Will Luckin be punished by Chinese regulators?
Published: Apr 29, 2020 06:48 PM

Chief economist with China Securities Zhang Anyuan

Editor's Note:

As Chinese regulators are reported to be sending a team to the headquarters of Luckin Coffee to investigate fraud allegations, analysts said that the US-listed company could become the first one to be punished by Chinese regulators under the cross-border supervision terms of China's new securities law that has taken effect since March. In an interview with the Global Times (GT), Zhang Anyuan (Zhang), chief economist with China Securities, said that Chinese regulators haven't said there would be punishment in the case. The current cooperation between Chinese and US regulators under the new law can fill the gap in cross-border securities supervision, and it's conducive for US-listed Chinese companies to improve their image.

GT: Is the Luckin case the first one under cross-border supervision between Chinese and overseas regulators? What positive effects could come from such cooperation?

Zhang: It's not the first case. The China Securities Regulatory Commission's (CRSC) cross-border cooperation with overseas counterparts has been going well under the IOSCO Multilateral Memorandum of Understanding. The CRSC has provided 23 overseas listed companies' audit work papers to overseas regulatory agencies, about half of which were submitted to the US.

Deepening cross-border supervision and law enforcement cooperation is in the common interest of investors and regulators worldwide. As China's financial sector accelerates its opening-up, the level of integration of domestic and overseas capital markets will become higher and higher, which also requires China to continue to strengthen cross-border supervision.

GT: US-listed Chinese companies have been targeted by a new wave of critics since the Luckin case. How do you look at their current conditions? Is the cross-border supervision conducive for investors and observers to eliminate prejudice toward them?

Zhang: US-listed Chinese companies are suffering collateral damage in some individual cases. The difficulties they face are partly from external factors, such as foreign investors' concerns over China's economic downturn, overseas short seller attacks and cross-border supervision gaps. But some of the difficulties are from inherent problems of the companies. Some US-listed Chinese companies do have loopholes in their operating model and their financial systems are not sound enough. Some companies even choose to list in overseas markets with lower listing requirements because they have difficulty obtaining domestic financing and fail to meet the domestic listing requirements.

This cross-border supervision cooperation, in the short term, will help improve the image of US-listed Chinese companies and demonstrate the determination of China's regulators to combat financial fraud. In the long run, only by filling up the gap in cross-border supervision, improving the level of audit supervision of listed companies, and encouraging overseas listed companies to improve the quality of information disclosure, can the prejudice from overseas regulatory agencies and investors be eliminated.

GT: Will Chinese regulators pursue cross-border jurisdiction and punishment for Luckin if the investigation results confirm the charges, according to the new securities law that has taken effect since March?

Zhang: According to the added cross-border supervision term in China's new securities law, for companies listed in overseas markets, if they interrupt domestic market order or hurt domestic investors' legal rights, it should be held accountable in China. Chinese investors have participated in Luckin's IPO and second placement. The free fall of Luckin's share price has hurt these investors' interests. This is why market analysts think the company is facing jurisdiction and punishment from Chinese regulators. 

Media reports said that the Chinese regulators have sent an investigation team to the company, but the CSRC has not made clear that it will exercise cross-border jurisdiction. If the CSRC only transfers the audit work paper and does not participate in further investigation, it can be seen that it is based solely on coordination and cooperation under the framework of cross-border regulatory cooperation.

The new securities law introduces cross-border jurisdiction terms mainly to prepare for the opening-up of the domestic finance sector. For companies like Luckin, whose main business is in China but are registered and listed in the US, according to the original securities law, China 's securities regulatory authorities can't supervise their capital operations, and foreign securities regulatory authorities can't exercise regulation in China. Under the new term, through the supervision of cross-border cooperation the supervision gap has been filled up.

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