KE Holdings Inc. became China’s first public offering to raise $ 2 billion from a U.S. listing since iQiyi Inc. on Thursday, when its share saw 87% close.
Less than an hour later, iQiyi gave a stark reminder of the rocky path many young Chinese stocks have taken on U.S. exchanges. Hovering over everything is the possibility that all Chinese companies will soon have to choose between living the laws of their own country or allowing American investors greater visibility into their finances.
IQiyi IQ,
IQ,
a streaming company often cited China’s Netflix, announcing that the Securities and Exchange Commission is investigating allegations that it inflated its user numbers, earnings and other metrics, crashing stocks after a 12% drop in trading after hours. IQiyi said it had hired ‘professional advisers’ and began an internal investigation.
IQiyi went public at $ 18 per share in March 2018, and has for the most part remained higher than that level in the public markets. It dropped lower last April, though, when Wolfpack Research, a short-selling Chinese IPO, released an alarming report on iQiyi’s all-inflated numbers. Dan David’s company based its report on personal surveys of people in iQiyi’s target demographic, credit reports for all related entities and holding companies, and data from two Chinese advertising agencies with access to iQiyi data.
That story feels too familiar to U.S. investors in Chinese stocks. Not long before Wolfpack’s iQiyi report, Luckin Coffee Inc. LKNCY,
called the Starbucks of China, shot down after similar accusations of over-inflating. Luckin has now lost 94% of its value, and the stock has been removed from the Nasdaq and is now trading on the counter. Luckin, however, was not the first company to pull the wool over the eyes of investors. According to Stop The China Hustle, a website created by Geoinvesting to draw attention to the issue, U.S. investors have threatened more than $ 50 billion over the past 10 years by publicly traded Chinese companies listed on the NYSE as the Nasdaq.
More from Therese: The Cautious Story of Luckin Coffee
While Chinese IPOs are required to file financial statements and other business statements with the SEC, they are extremely risky for investors. These companies have created complex business structures to evade both legal action from investors and consequences of the Chinese government banning foreign investment in certain types of Chinese companies, including technology companies. In addition, their audit firms do not have access to what is called the company’s working papers, so they can only perform their audits based on material provided by business leaders.
Chinese deals are starting to get attention in Washington, with the House of Representatives adopting the “Keep Foreign Business Accountability Act” in May. But the current heavy-handed approach, which seeks to de-list companies that do not allow a control check after three years, would in fact further hurt American investors. In addition, as U.S.-China relations continue to decline, recent legislative efforts have been described by some pundits as attempts to advance foreign policy under the guise of securities laws, according to scientists at the Cato Institute, a Washington think tank.
Also read:Washington is definitely paying attention to Chinese IPOs, but Wall Street can pay the consequences.
Yet nothing stops the constant parade of Chinese companies on Wall Street. According to Renaissance Capital, which tracks IPOs and manages IPO ETFs,
IPOS,
18 Chinese companies, including KE Holdings BEKE,
, have gone public so far this year, raised $ 5.5 billion, excluding companies with low controls (yes, China is doing this too). That compares with 13 deals that raised $ 2.7 billion in the same time frame last year. So far this year, Chinese companies have already raised more cash than the full year of 2019, when 25 companies raised $ 3.5 billion, according to Dealogic.
See also: The CEO who made one of Silicon Valley’s worst acquisitions wants a $ 400 million blank check
Investors clearly cannot get enough of Chinese initial public offerings. Since missing the boat on the real Netflix and many other no-hot tech companies in the US, they hope to catch the lead on a copycat company with an even more massive addressing market in China. But until these companies are adhered to the same accounting standards as U.S. companies, they will always be at much higher risk because it is easier for executives to fudge or fabricate numbers with less security and watchdogs. Investors need to be aware of the major risks involved.
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