The Chinese coffee merchant, who admitted having inflated his sales, has become the symbol of the corruption of Chinese companies used to exclude Chinese companies from the American stock market, explains Simon Leplâtre. Posted on July 07, 2020, at 08:49 am Reading time 3 min.
Luckin is a business without a boss. Its founder, Lu Zhengyao, or Charles Lu, was dismissed by a board of directors on Sunday, July 5. The company, accused of fabricating more than $ 300 million in false sales, was suspended from trading at the Nasdaq in New York on Friday, the first step in an eviction process. The end of a financial thriller gave the material to the defenders of a law aimed at banishing Chinese companies from the US stock market, in full economic decoupling between the two leading world economic powers.
Founded in 2017, Luckin is a company that has sold coffees to the Chinese middle class. Like any self-respecting start-up, it promises to “disrupt” established players in the industry, most notably Starbucks. His model is to offer only take-out or delivery, installing simple counters to save on real estate.
In 2018, Luckin opened new cafes every few hours. Investors were jostling. After a year and a half of existence, the company is raising Nasdaq $ 651 million. Six months later, Luckin announces sales up 558% year on year. In January 2020, the Luckin shares have almost tripled in value since its introduction to $ 50.
But the mysterious report overturned the golden tale sold by Charles Lu to its shareholders. Distributed by Muddy Waters, a US finance company specializing in a down bet, the report says sales must be rigged based on thousands of video surveillance hours to count the brand’s customers. Two months later, the company admits to having falsified more than $ 300 million in sales, using vouchers bought by Luckin employees or front companies owned by the founder’s relatives. The company’s value, which had reached 12 billion dollars (10.613 billion euros), falls to less than a billion.
The lack of regulation in a relatively young market (private companies only emerged from the 1980s) and long used to endemic corruption: fraud is so widespread that financial audit companies find it challenging to do their work.
If a series of scandals have not changed China’s situation, distrust against Chinese companies has crystallized in the United States this year. In contrast, the trade conflict has turned to the systemic rivalry between the two giants. Luckin’s case served as a scarecrow to convince US senators to vote the Holding Foreign Companies Accountable Act.
The law is yet to pass the House of Representatives. It requires companies to submit the report at least every three years to an American institution audit, a rule established since 2002. China prevents its companies from submitting, in the name of state secrets.
If the law is passed, Chinese tech giants like Alibaba and Baidu could be squeezed out of the US financial centers within three years. Many have anticipated this risk: Alibaba, Netease, JD.com recently launched second listings on the Hong Kong Stock Market.
According to Larry Kudlow, one of the President’s economic advisers, their exclusion would also deprive American investors of the best-performing companies in recent years. “No one can invest in China with confidence. We have learned that Chinese companies are not transparent. They don’t meet standards, regulations. So far, American investors have been willing to take the risk.