May 15, 2020 at 5:00 am ET
That China did little to warn or prepare the globe to confront the COVID-19 pandemic, is only the latest example of malfeasance by that nation.
While our president remains focused on pushing the blame for his flawed COVID-19 response back onto China, we need to act swiftly to prevent another Chinese contagion from costing Americans billions more.
In recent years, a growing number of Chinese businesses have sought access to American capital by becoming publicly traded on American stock exchanges. Simultaneously, American companies have been enticed by the amazing growth potential in China and began doing business there. To a degree, this interdependence benefits both countries.
However, the Chinese government’s lax regulatory oversight has allowed fraudulent businesses to flourish. Our markets are so intertwined that these Chinese scams now threaten to erode confidence in American markets. This is deeply problematic for our economy, especially as we seek to recover from the pandemic.
One example of this growing problem is the recent scandal surrounding the Chinese-based rival to Starbucks, Luckin Coffee.
In May 2019, Luckin became a publicly traded company on the NASDAQ exchange. With Luckin’s promise to become the largest coffee brand in China and the confidence that comes with investing in a company on US exchanges, thousands of American investors bought shares.
Less than a year later, Luckin was exposed as a fraud. The company’s chairman apologized for $310 million in falsified sales, shares immediately plunged 75 percent, and the stock stopped trading on April 6.
How could such a blatant scam end up on the NASDAQ?
First, Chinese companies like Luckin are typically audited by Chinese auditing firms. China is one of the only countries that doesn’t allow the Public Company Accounting Oversight Board to review these audits. The PCAOB ensures that foreign auditors are doing their job and they report their finds to the Securities and Exchange Commission. We should no longer allow any company to be publicly traded in America if the PCAOB is not allowed to access their audits.
Second, leading U.S. institutions ignore red flags and willingly stamp legitimacy on these risky Chinese companies. A private equity arm of New York-based BlackRock, the world’s largest asset manager, propped up Luckin with $125 million before it went public in 2019. BlackRock’s funds remained a top holder of Luckin stock into this year as well. With limited resources, many non-professional investors trust the due diligence of huge firms like BlackRock to make their investment decisions.
It turns out that BlackRock has also facilitated the flow of U.S. investor dollars into other Chinese companies that have been accused of fraud in recent weeks, including TAL Education and iQiyi. By lending its support to these suspect companies, BlackRock is making a conscientious decision to profit from undermining the integrity of American markets.
To be clear, BlackRock is not the only American company to look the other way in order to have access to China’s economy, soon to be the largest in the world. This is a growing problem.
The only way policymakers can protect our economic system from the growing threat of fraudulent Chinese companies is to hold the U.S. companies that partner with them accountable. Since U.S. regulators can’t review the books of these Chinese companies, large American investment houses must bear some liability if they are propping up frauds.
This is critical, because these large investment firms – like BlackRock – strategically use their size to influence markets. We cannot allow them to have this advantage over the average investor, while simultaneously partnering with Chinese companies that have no genuine accounting standards.
China’s abhorrent behavior is no longer contained in China. Just like COVID-19 is infecting our fellow Americans, their fraudulent business practices are threatening to undermine the value of the American stock markets. Enough is enough.
My former colleagues in Washington must pass laws that hold American companies accountable for being complicit in efforts by the Chinese government to enrich themselves and corrupt the integrity of the U.S. financial markets.
Silvestre Reyes, a former U.S. congressman from Texas, served as chairman of the House Select Intelligence Committee from 2007-2011.
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