August 3, 2021

The “American dream” cracks for the Chinese on Wall Street

“Of the 25 Chinese companies that went public last year in the United States, only four have seen their shares increase in value.” (Photo: Getty Images)

Suspicion of corruption or turnover inflated by billions: Chinese companies listed in the United States are accumulating setbacks, at the risk of tarnishing their international image.

More than 150 companies from the Middle Kingdom are listed in the United States, where they were worth $ 1.2 trillion in 2019, according to figures from a commission of the United States Congress.

One of the heavyweights on the list is Alibaba, the e-commerce giant, which in 2014 had the biggest all-time IPO on Wall Street, raising $ 25 billion.

But this success is now an exception.

“Of the 25 Chinese companies listed on the stock market last year in the United States, only four saw their shares increase in value,” analyst Matthew Kennedy of Renaissance Capital firm told AFP.

And for the third time since the beginning of the month, a Chinese company listed in the United States denounced the questionable practices of one of its executives.

Internet giant Baidu announced on Wednesday that one of its former vice-presidents was under investigation for corruption. The first Chinese search engine did not give any details on the facts of which it is accused, while the title nodded to the Nasdaq.

Lost trust

At the beginning of April already, an executive of Luckin Coffee, rival displayed in China of the American giant Starbucks, was suspended for having artificially inflated the group’s turnover by nearly 2.2 billion yuan (290 million euros).

These revelations had the effect of a bomb on the markets: in the process, the share of Luckin Coffee lost more than 70%.

“For a Chinese firm, being listed in the United States is unfortunately not a guarantee against fraud,” analyst Nigel Stevenson of GMT Research told AFP.

Luckin “will have a lot to do to regain investor confidence,” warns Matthew Kennedy.

Wall Street is likely to be “more skeptical” of Chinese companies, says Kennedy. “But I think we should see large-scale scams before investors turn away completely,” he tempers.

Since its launch in 2017, Luckin has opened more than 4,500 points of sale in China. This is more than Starbucks, its direct competitor (around 4,200), which has been established in the country since 1999.

And unlike the vast spaces of the American, the chain mainly offers minimalist points of sale, with low-price cafes, previously paid for on a mobile application.

“This economic model is absolutely not viable”, assures AFP Mr. Kennedy.

“Hard lesson”

To finance its all-out expansion, Luckin quickly entered the Nasdaq in May 2019 and was able to raise $ 561 million “without having proven itself”, Mr. Stevenson wonders.

“Fraud is often when the results are too good to be true,” says Kennedy.

The insolent results are also what the Chinese giant of online courses, TAL Education, posted: turnover up 47% over one year, a 66% jump in student registrations.

But an internal audit in early April noted irregularities last year in the accounts of the company founded by Zhang Bangxin, one of the richest people in China.

TAL Education, listed since 2010 in the United States, pleaded good faith, explaining that the fraud was the product of a dishonest employee and that the company was not aware of these practices.

According to analyst Alvin Cheung, of the brokerage firm Prudential, quoted by Bloomberg, these cases “raise a big question for (foreign) investors: can we trust the good financial results of Chinese firms? “

On Wednesday, an official with China’s Banking and Insurance Regulatory Commission called Luckin’s alleged fraud a “hard lesson” and promised “zero tolerance” for the practice.

But in a context of commercial, technological and political rivalry with Washington, Beijing now encourages its companies to choose instead the places of Hong Kong or Shanghai to raise funds.