Carson Block Says U.S. Should Be Willing to Drop China Listings
Carson Block Says U.S. Should Be Willing to Drop China Listings
(Bloomberg) -- Stock market catastrophes like Luckin Coffee show U.S. regulators and exchanges need to be much more judicious in their embrace of China-based companies, says Carson Block, the famous short seller.
The Chinese coffee chain, once a $12.6 billion company, is being ousted from the Nasdaq after accusations of accounting fraud led the onetime market darling to say its chief operating offers may have fabricated billions of yuan in sales. The stock’s value fell to about $700 million on Wednesday as trading resumed for the first time in more than a month. In an interview with Bloomberg TV’s Erik Schatzker Wednesday, Block warned that among U.S.-listed Chinese companies, “a substantial majority are committing at least some level of fraud” by American investors’ standards.
Block has, for years, been among those questioning the transparency of Chinese companies trading in the U.S. after a series of blow-ups like Sino-Forest’s 2011 collapse exposed serious accountability issues. That’s led to calls for tighter audits of China-based firms looking to list in the U.S. and even cancellations of those public debuts. U.S. exchanges should be willing to give up listing fees of future Chinese IPOs to protect retail investors from potential frauds, Block said.
“I think we should be willing to lose those listings because while institutional capital is capable of following these, quote, companies to Hong Kong or London, American retail I think will be much less likely to follow,” Block said in the interview. “This will be preserving capital of U.S. retail investors.”
Luckin Coffee, which has lost more than 90% of its value since Muddy Waters disclosed a short call on the stock in January, isn’t the only firm currently embroiled in accounting scandals. TAL Education Group, a tutoring business whose success turned its founder into one of China’s richest people, said last month that a routine internal audit found an employee had inflated sales by forging contracts.
A blow on reputation of Chinese listings in the U.S. coupled with political pressure between Beijing and Washington have dried up the market for Sina IPOs on domestic exchanges. Some 32 Chinese companies, including special-purpose acquisition firms, went public in 2019, down from 39 a year before. Out of 12 Chinese firms that had their debuts in 2020, nine trade below their IPO price, data compiled by Bloomberg show.
A push in Washington to consider measures to reduce American capital flowing to Chinese securities may put a further damper on demand. The Senate on Wednesday approved legislation that would bar some Chinese companies from being listed on U.S. stock exchanges. The bill would require companies to certify that they are not under the control of a foreign government.
“After a decade of pounding the tables on the issue of China companies defrauding U.S. investors, we are encouraged to see this bill pass the Senate and we hope it becomes law,” Block said in a separate email following his TV interview. “By listing in the U.S., these companies have ready access to U.S. retail investors’ money, and so long as China effectively remains a rogue country for U.S. securities regulation, its companies should not have access to our markets.”
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