The Securities and Exchange Commission singled out China in an investor warning about emerging market transparency troubles following two cases of accounting issues from U.S.-listed mainland firms.
Earlier this week, the SEC issued a statement warning against the risk of emerging market investments on issues such as transparency and investor protection. Whilst the statement was titled to be directed at developed markets in general, «China» could be found on the document 29 times with mention of no other countries.
«Our ability to promote and enforce [regulatory] standards in emerging markets is limited and is significantly dependent on the actions of local authorities – which, in turn, are constrained by national policy considerations in those countries,» said the SEC in the statement.
«As a result, in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies.»
U.S.-China Financial Sector Outlook
The statement does not bode well for the concurrent event of greater participation by American financial giants into the mainland’s financial sector including the likes of J.P. Morgan, Blackrock and Goldman Sachs. Whilst it remains to be seen what role the broader U.S. has to play in the entrance into China’s financial sector, the statement at the very least does not signal loosening mediation of the relationship between American investors and Chinese investments.
«Due to jurisdictional limitations, matters of comity and various other factors, the SEC, Department of Justice and other U.S. authorities may be limited in their ability to pursue bad actors, including in instances of fraud, in emerging markets,» continued the statement, co-authored by SEC chairman Jay Clayton and chairman of the Public Company Accounting Oversight Board (PCAOB) William D. Duhnke III.
«For example, in China, there are significant legal and other obstacles to obtaining information needed for investigations or litigation. Similar limitations apply to the pursuit of actions against individuals, including officers, directors and individual gatekeepers, who may have engaged in fraud or other wrongdoing.»
Accounting Troubles
SEC’s statement follows the exposure of a major accounting scandal that alleges that Chinese coffee giant Luckin inflated its sales by more than $300 million prior to a listing in the U.S. Its shares plunged more than 80 percent before a trading halt pending further disclosure.
Five days later, another Chinese firm, TAL Education, announced that it had also inflated revenue from a business line that accounted for 3-4 percent of total revenue which sent its shares tumbling as well.