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Trade war

Luckin first casualty as US takes aim at China transparency

Nasdaq’s delisting of coffee chain follows Trump call for higher accounting standards

President Donald Trump speaks with reporters after meeting with Senate Republicans at their weekly luncheon on Capitol Hill in Washington on May 19.   © AP

NEW YORK -- U.S. President Donald Trump and his Republican Party have doubled down on making China transparency a top issue in an election year, both in terms of the coronavirus response as well as listed companies.

While Trump repeatedly accuses China of failing to be open and honest about its handling of the outbreak, his administration is considering steps that would close off its stock markets to Chinese companies that do not comply with American rules.

China's Luckin Coffee, which has become a poster child of such misconduct, said Tuesday that it would be kicked out of Wall Street's tech-heavy Nasdaq after admitting to fabricating $310 million in sales last month.

Luckin received a delisting notice from the bourse Friday. The coffee chain said it plans to request a hearing with Nasdaq to appeal the decision.

Nasdaq's move followed Trump's remarks Thursday that his administration is looking "very strongly" at ways to hold U.S.-traded Chinese companies to American audit standards, including using delisting as an ultimatum.

The exchange, which hosts companies such as JD.com, Haier Electronics Group and Baidu, is also stepping up its own rules. On Monday, it filed to the U.S. Securities and Exchange Commission new restrictions that target initial public offerings from countries with so-called secrecy laws -- most notably China, which bars American regulators from auditing businesses there.

The rule change would turn away Chinese IPOs smaller than $25 million, unless the companies raise the equivalent of a quarter of their post-listing market capitalization, and apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company's auditor, according to documents seen by the Nikkei Asian Review. The proposals are subject to approval by the SEC.

"We have to" push for more accountability among these companies "for investor protection and ... for national security," Trump's top economic adviser Larry Kudlow told Fox Business Tuesday.

Chinese businesses listed on various American bourses, including such tech giants as Alibaba Group Holding and state-owned mega-enterprises such as PetroChina Company and China Petroleum & Chemical Corporation, amount to a total market capitalization of over $1 trillion.

"A lot of these companies, by the way, have already had scandals and cost investors a lot of money because of their failure to be transparent in their reporting," Kudlow said. "The Chinese government forbids that kind of transparency."

The White House is also moving to limit the flow of American capital into Chinese stocks through investments by a federal pension fund called the Thrift Savings Plan.

"Transparency, openness, accounting rules, not fraud accounting rules -- these are the themes we are pursuing," Kudlow said. "We start with the Thrift Savings. But the administration wants to protect investors and we will be studying that over the next weeks."

Asked if he thinks China would retaliate to such crackdowns by selling U.S. debt, Kudlow said, "the solution for China is not to sell U.S. bonds, which would bankrupt the Chinese government."

"The solution for China is to put some transparency and openness into it," he said. "Just as, as I want to refer back to the president's incredibly tough letter to the World [Health] Organization that went out last night."

"All of these things are of a piece," he added.

A day prior, a group of Republican senators had urged the Senate Banking Committee to prioritize a legislation that would address the same issue by increasing oversight on Chinese firms and force those out of compliance to delist after a period of three years. 

The way Beijing shields these companies from U.S. financial regulators "created an unfair advantage for Chinese over American companies," Republican senators Marco Rubio, Tom Cotton, and Rick Scott said in a letter to the committee. 

"Recent financial scandals involving Chinese companies listed on U.S. stock exchanges, like Luckin Coffee, demonstrate the need for full oversight of Chinese companies" and "highlight the ongoing harm to American investors and capital markets caused by this bifurcated system," they said. "Chinese companies can ignore U.S. laws while reaping the benefits associated with accessing the world's deepest and most liquid capital markets."

Speaking to Fox on Thursday, Trump warned however that a broad delisting rule would simply drive Chinese companies to seek capital elsewhere, such as London and Hong Kong.

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