The US Gets Tough on China’s IPOs and They Shift to Europe

Commentary

The United States is getting tough on China’s initial public offerings (IPOs) on Wall Street, so those IPOs are going to Europe. That’s finance for you. Go to where the suckers are.

After about $100 billion in international investment in U.S.-listed Chinese companies over two decades, the U.S. Securities and Exchange Commission (SEC) is finally demanding that they follow the auditing rules required of all other publicly-listed companies.

Why they weren’t required previously is anybody’s guess. God knows they needed it.

Here’s an example. In 2012, China Medical Technologies collapsed—but not before it had raised $426 million from international bond sales in 2008 and 2010. Allegedly, the wife of one of the senior executives gambled over $100 million of the money in Las Vegas. In 2006, the company reportedly paid another $176 million to a Chinese diagnostics company worth just $155,000.

In 2017, the U.S. Department of Justice declared the company’s CEO and CFO to be fugitives, having allegedly “defrauded China Medical’s noteholders and investors of more than $400 million through misrepresentations about the use of proceeds raised through two note offerings and by then stealing the invested funds by transferring them to entities controlled by, or affiliated with, Wu and Tsang [the CEO and CFO].”

The two executives live in China. Beijing is not extraditing them to the United States, which gives tacit approval to their questionable lifestyle choices.

Now KPMG, the U.S. accounting firm making plenty of money in China, is accused in a Hong Kong court by the liquidator of China Medical Technologies of an “appalling” audit that allowed China Medical Technologies to execute the “brazen” accounting fraud, according to the Financial Times. The court heard the case on Sept. 5.

KPMG previously faced scrutiny over its China accounts, having settled another similar case, for $48 million, regarding alleged fraud by China Forestry.

All of the big four American auditors—including Deloitte, Ernst & Young, and PricewaterhouseCoopers—according to the Financial Times, are under the microscope for audits related to failing property developers and U.S.-listed companies over allegations linked to accounting, stock manipulation, or fraud cases.

As should be evident, even U.S. auditors cannot always protect investors from fraudulent companies, especially when those companies are paying the audit bill from abroad. Given that the Chinese Communist Party (CCP) will be pre-sifting audit records before U.S. regulators get to them, it’s unclear how investors will be reasonably protected.

So expect more lawsuits. The Big Four better increase their China-related fees to pay for them.

Other recent cases include a $300 million alleged fraud at Luckin Coffee in 2020, and Beijing’s targeting of Didi Chuxing, a ride-hailing app in China similar to Uber, just a few days after the company went public in a $4.4 billion IPO. Its market value promptly fell by approximately 80 percent. Those investors are justifiably irked at the regime in Beijing, and Didi itself, for not warning investors of the risk and canceling the IPO before all that money poured in.

So the new U.S. laws—weak as they are—may finally turn the screw at least a little on the approximately 200 Chinese companies on U.S. exchanges. They should force these companies to divulge their audit files to the SEC or delist.

Some good news is that new Chinese IPOs are deterred by the laws, and some are listing elsewhere. Josh Rogin noted in The Washington Post last month, “Good riddance.” Nobody should want companies structurally enabled to bilk investors to suction billions more dollars.

Investors in Europe, where the Chinese IPOs are headed, are unprotected. Chinese companies already raised over $2.1 billion in London and Zurich this year, whereas China’s U.S. listings are down to just $400 million (in each of 2020 and 2021, new China listings in the United States exceeded $10 billion).

This is the first time Europe exceeded the United States in Chinese listings, which is no feather in its cap.

“Zurich, in particular, has benefited from a new ‘stock connect’ scheme with mainland Chinese exchanges and its less demanding requirements over the transparency of company audits,” according to the Financial Times.

London and Hong Kong also have much ballyhooed, by China’s state-controlled media, stock connects to grease the skids of money flowing into unaccountable companies on the mainland.

But even European politicians are wising up, at least to a small extent. A new law that follows something similar in the United States is planned against products that use forced labor. This will, in particular, hit imports from China, as even components (such as computer chips used in electronics and vehicles) that have raw materials (such as silica) sourced from forced labor (much silica comes from Xinjiang) will be subject to bans.

That means iPhones made in China may be banned in Europe.

To channel Beijing into compliance with international norms will require a sustained and unified effort by the international community because the CCP is so resistant to anything that puts a limit on its power.

A global approach to banning forced labor and fraudulent listings should be followed by a combined requirement by not only the United States, but the European Union, Japan, and United Kingdom that foreign (just like domestic) companies listed in allied economies submit all audits, including on forced labor, to local regulators. Any country not in compliance should be subject to secondary sanctions.

This should have been a legal requirement from the beginning of engagement with China to protect investors from fraud and consumers from the products of forced labor. Our government’s failure to do so decades ago requires investigation and explanation.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.