Removing Rogue Chinese Firms from US Stock Exchanges
By now you should have chanced upon news that talk about the US Senate passing a bill that allows more transparency on companies listing shares on US stock exchanges.
This move can lead to many Chinese companies from listing or raise money from investors in the US.
What on Earth is Happening?
If you are lost about what on Earth is going on, and what caused the sudden tension, allow us to break it down for you.
The Holding Foreign Companies Accountable Act
I know we talked about Chinese “Starbucks” earlier, but let us bring you on a journey to give you a deeper understanding of the situation.
- In March 2019, a bill entitled Holding Foreign Companies Accountable Act was introduced
- The bill requires companies listed to disclose information on whether they are owned or controlled by a foreign government.
- The bill requires companies listed in the US to have more transparency by making it compulsory to submit an audit
- On top of that, the SEC will have the right to audit the audit.
- If this is not done over a three-year period, the company will be delisted.
This affects Chinese companies even more simply because China does not allow US regulators to access to audit reports for their companies.
So What is this Luckin Coffee Saga About?
Luckin Coffee was considered a huge threat to Starbucks in China. They are really competitive on their pricing and were fighting head-on for the same demographic which Starbucks wants in China.
On top of that, being a homegrown brand fueled by an aggressive plan to grow, people are calling them the next “Starbucks”.
Well, that was until it all turns to sh*t.
On 19 May 2020, Luckin Coffee was delisted from the Nasdaq. Their financial data was inflated.
The sales figure was fabricated by 2.2 billion yuan (S$440 million).
While the bill was proposed in the year 2019, Luckin Coffee’s incident further highlights some of the major loopholes in the US exchanges when it comes to foreign companies.
This, coupled with Trump’s constant trade war with China, might have resulted in a swifter action of passing the bill.
In short, Luckin Coffee sabo sia!
What Does the Passing of this Bill Mean to Singaporean Investors?
The passing of the bill can result in several China companies being forced to delist. There are about 156 Chinese companies that could be affected by this bill include Alibaba, Baidu, Weibo Corporation, etc. These companies have a total market cap of US$1.2 trillion, which is going to be a tricky issue for both the companies and the exchanges.
Investors of these companies might start seeing a declining trend for the stocks they invested in.
While we believe that China will not take this lightly, investors might want to keep a closer look on the news during this period of time.
In the long run, the bill is good in strengthening corporate governance. This can create a better environment for investors on the exchanges.
Looking at the example of Luckin Coffee, the stock price dropped by 32% after a trading halt that lasted for more than a month. It is believed that the stock price will continue its downward trend. We can only imagine the losses some of these investors are taking.