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China Short: wake up and smell the fraud!


“China is to stock fraud, as Silicon Valley is to technology.”

Carson Block, founder of Muddy Waters Capital



Hong Kong (HK) remains enormously important as a financing centre for China.


The Chinese Communist Party (CCP) is directly involved in everything that mainland Chinese companies are doing and CCP members personally benefit in corrupt ways. A prime example is anything to do with equities and debt for mainland Chinese companies.


Critical thinking must be applied judiciously in CCP related financial instruments. Mainland Chinese companies do not have the same ethos nor operate in the same business or regulatory environment as those of say a US company trading on Wall Street.


The danger for HK is being dragged too far into CCP's rule BY law and corruption, to the point where it's own markets become so tainted that they lose their value.


Instead of the democratic West reeling in China - using greed, the CCP is reeling in a corrupted West. CCPvirus!




The Big China Short

Thewirechina.com 26 April 2020


The secret operation got underway late last year. A small army of researchers were told to fan out across China, to cities big and small, to collect documents and videotape the activities of the prime target.


The organizers had a hunch that Luckin Coffee, China’s fast-growing challenger to Starbucks and a company traded in the U.S. stock market, was falsifying financial statements to exaggerate its sales. The organizer set out to prove it, deploying 1,510 investigators to count sales and record traffic at more than 600 of the company’s retail stores, one mobile phone video at a time.


A few months later, an anonymously written 89-page report landed on Wall Street and leveled one of China’s hottest startups. A pack of short-sellers — who backed the report’s harsh conclusions — pounced. They positioned themselves to profit from a collapse in Luckin’s stock price and began releasing more allegations of fraud, staggering the company just as the world was going into lockdown over the Covid-19 pandemic.


Caught in the maelstrom were some of the world’s most sophisticated banks and investment firms, including the Capital Group, Credit Suisse and Point72 Asset Management, which is run by Steve Cohen, the hedge fund manager who at one time ran SAC Capital.


Luckin, in many ways, exemplified the China hype. What Baidu is to Google and Xiaomi to Apple, Luckin was supposed to be to Starbucks — a homegrown competitor, backed by state and private financing and cheered on by state media. Luckin promised low-priced coffee, ubiquitous store locations, and delivery to your home in 30 minutes. It also promised a way for global funds to invest in China’s economic miracle.


“People should have seen this coming,” said Michael Norris, a research and strategy manager at Agency China, in Shanghai. “There was this disconnect between what Luckin was and how it was portrayed in the English language press. People couldn’t get past this idea that it was the Starbucks of China, or a Starbucks challenger.”


On Sunday, one of China’s top regulators, the State Administration of Market Regulation, raided Luckin’s headquarters in the city of Xiamen, in southern China, as part of an investigation into the company’s accounting practices, according to the Wall Street Journal.

The downfall of Luckin, which declined to comment for this article, has intensified scrutiny of Chinese companies listed in the U.S., cast suspicions on the due diligence process at global investment banks and accounting firms, and provided new ammunition to Washington lawmakers already antagonistic towards China.


Senator Marco Rubio, R-Fla., recently called Luckin’s alleged misdeeds “outrageous.” In June, he helped introduce a bill that calls for U.S. exchanges to delist the companies that fail to comply with American regulations, a proposal clearly aimed at Chinese companies.


And last Tuesday, the chairman of the U.S. Securities and Exchange Commission and the head of the Public Company Accounting Oversight Board released an unusually candid warning about the risks that investors in U.S. markets face with listed companies that operate predominantly in emerging markets like China. The joint statement noted that neither the S.E.C. nor the accounting oversight board have access to accounting documents in China, or the ability to engage in enforcement actions. The Chinese government has routinely denied access to overseas regulators, citing state secrets laws.


In the Luckin case, the anonymous exposé leaked out of China and fell into the hands of a group of American and global short-sellers. It was reviewed and made public by Carson C. Block, the head of Muddy Waters Capital, a San Francisco-based firm that specializes in profiting from falling stock prices. He has declined to say who produced it.


The company, after initially disputing the allegations, confessed to one key finding in the report: that the three-year-old startup vastly overstated its sales. In early April, the company said a special audit led by Ernst & Young found that Luckin’s chief operating officer, Liu Jian, and other employees had carried out a scheme to fabricate more than $300 million in revenue in the six months ending Sept. 30. The stock tumbled by more than 90 percent from its high. About $11 billion in wealth vanished.


It was a dramatic turnabout for a company that had backing from some of the biggest names on Wall Street, including Credit Suisse and Morgan Stanley. It had also hired powerful law firms and an affiliate of one of the big four accounting firms.


Now, some of those backers are reviewing their vetting process and counting losses because of loans made to Luckin’s top executives with their Luckin shares pledged as collateral. And in an unusual move, the China Securities and Regulatory Commission issued a statement earlier this month condemning Luckin, even though the regulator has no jurisdiction over Chinese companies listed in the United States.




China's stocks short-selling at a record high

Reuters 14 April 2020


SHANGHAI (Reuters) - The value of shares that investors in China’s onshore stock markets have borrowed to sell short held close to record levels set last week, amid bearishness over the new coronavirus pandemic, market data released onTuesday showed.


The value of shares used for shortselling was around 20 billion yuan ($2.83 billion) on Monday, just a touch below the record 20.3 billion yuan set on April 9, according to the latest data from China Securities Finance Corporation, a financial institution cofounded by Shanghai Stock Exchange and Shenzhen Stock Exchange.


That is double the level seen before the Chinese Lunar New Year holiday, when the scare over the epidemic in China began impacting global markets.


China's benchmark Shanghai stock index .SSEC has lost 7% so far this year.


Among the shares most targeted for short-selling by Chinese investors were Kweichow Moutai (600519.SS), the country’s largest liquor maker by market capitalisation, and an ETF tracking China’s CSI300 blue-chip index (510300.SS).


The data showed stocks on China’s newly launched STAR Market, were more heavily shorted than main board peers, as investors have more ways to borrow stocks in the STAR Market.


Despite being at record levels, the shortselling has little impact as China’s stock markets have a total market capitalisation of more than $8 trillion, according to Song Jing, analyst with Nomura Orient International Securities.


The amount of shortselling is also dwarfed by the near 1 trillion yuan worth of stock purchases investors have made on margin, wherein they borrow to fund these investments, revealing the heavy skew in the country’s equities market.




China warns audit plans will drive companies from US exchanges

Financial Times 24 May 2020


Beijing says Senate proposals are aimed at its groups and would politicise securities regulation.


China’s securities regulator has hit back at a proposal by Washington that could effectively force companies from the country to delist from US stock exchanges, saying such a move would “weaken confidence” in American markets.


The US Senate last week unanimously passed a bill that would force companies to delist from US stock exchanges if they did not comply with US regulatory audits, something many Chinese companies are unwilling or unable to do.


On Sunday, China’s securities regulator issued an unusually stern response, saying the proposal “was directly targeted at China”, and “politicises securities regulation”.


The bill would “weaken the confidence of global investors in US capital markets, and their global position,” said the China Securities Regulatory Commission.


“We believe that global investors will make their own wise choices, according to what benefits them the most,” the CSRC added.


Although the US and China have agreed a pause to the escalation of trade tariffs, tensions between the two powers have been escalating on other fronts, including Beijing’s move to impose a new national security law on Hong Kong.


On Sunday, thousands of demonstrators took to the streets of Hong Kong’s city centre to protest against the move, leading police to fire tear gas and water cannons.


Mike Pompeo, US secretary of state, last week described the law as a “death knell” for autonomy in the financial hub and warned it would “impact” Washington’s decision on whether to extend the special trading status currently afforded to the territory.


The US recently tightened its sanctions on Huawei, leaving the Chinese telecoms company to warn its survival was at stake, while earlier this month, president Donald Trump ordered the main federal government pension fund not to invest in Chinese stocks.


Wang Yi, China’s foreign minister, said on Sunday that political forces in the US were trying to push the two countries into a “so-called new cold war”.


The US-China dispute over securities regulation comes after the collapse of Luckin Coffee, a New-York-listed coffee chain that had admitted to fabricating over $310m of its sales. The revelation led to share prices plummeting for a number of other Chinese companies that had recently listed in New York.


Baidu, China’s dominant search engine with a market capitalisation of around $35bn, said last week it was rethinking its Nasdaq listing in light of the Senate bill. Baidu’s chief executive said the company was considering a secondary listing in Hong Kong.


Chinese tech companies have long tapped US stock markets. At home, they face capital controls that limit their access to dollars, and more stringent listing requirements. Chinese regulators have tried to get start-ups to list at home on Shanghai’s new “Star” board, which has not proved as lively as hoped.


The Public Company Accounting Oversight Board, the US accounting body, has long complained of having access blocked to the accounts of companies registered in China and Hong Kong by the local authorities.


The US bill, which is yet to be passed by the House of Representatives, means companies would be delisted if they did not comply with audits by the PCAOB for three consecutive years. Foreign companies would also be required to disclose whether they were owned or controlled by a government.


“This bill completely ignores the longstanding co-operation between the US and China’s regulatory agencies on strengthening oversight and audits,” the CSRC said on Sunday, citing recent exchanges with the PCAOB.


But, the PCAOB wrote in a statement several months ago, “Chinese co-operation has not been sufficient for the PCAOB to obtain timely access to relevant documents and testimony necessary to carry out our mission, nor have consultations . . . resulted in improvements.”


References:

Real money. Toxic Chinese stocks

Muddy Waters Research




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