Carson Block Renews Short-Selling Attack on Chinese Tutoring Firm After Stock Surge
Carson Block, the founder of Muddy Waters Capital LLC, has renewed his short-selling attack on Chinese after-school tutoring platform GSX Techedu Inc., which he called out as a fraud last month.
In a Bloomberg Television interview, Block called the $14 billion stock’s recent price surge “a massive middle finger pointed at Washington.” He also alleged failure by China’s securities watchdog to regulate the U.S.-listed company.
The China Securities Regulatory Commission “should start looking into this and frankly, cracking some skulls,” Block added. “If they don’t do it, it’s going to reinforce the perceptions that a lot of us here in the U.S. have, and that is the CSRC is not intending to be a serious regulator of U.S.-listed China companies.”
Block mounted an attack on the Chinese firm in May, joining other short-sellers who were questioning its business model and calling its numbers too good to be true. Block claimed that at least 70% of the firm’s users are robots and called it a massive loss-making business. The stock has since soared more than 90%, to its highest level since the company went public a year ago.
“I don’t think the problem is that we failed to convince anybody,” Block said. “We understand that there’s a lot of support through the options markets. You could see that somebody is kind of reliably jamming it into the close most days.”
Muddy Waters “clearly lacks a basic understanding of the Chinese education sector” and has “no idea how we start our classes,” a GSX spokesperson said in response to Block’s latest comments. The short-seller failed to recognize the increase in cash balances and net operating cash flows at GSX during 2019, the spokesperson added.
Fraud at Chinese companies is topical again after revelations at Luckin Coffee Inc., one of China’s brightest startups, earlier this year. The U.S. Senate approved a bill in May that would require companies to certify that they are not under the control of a foreign government. There has also been renewed push from the Trump administration to limit Chinese firms’ access to U.S. capital.
It’s not clear how the China Securities Regulatory Commission can affect a company listing outside the country. The CSRC openly denounced Luckin Coffee for accounting fraud in April. And later the Chinese regulator said it has communicated with the U.S. Securities and Exchange Commission on cooperation of cross-border supervision, and has always supported oversea regulators, although the delisting of Luckin is up to Nasdaq, not the Chinese regulator.
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