Fast forward to the present day and we watched an eerie replay of this situation — but this time through a Chinese ADR. The company in question was Luckin Coffee, a highly touted “Starbucks killer” that was bragging about explosive growth rates.
A short seller research firm published a highly damning report claiming that the company was essentially a fraud and was misstating its numbers to be much larger than they really were. After increasing pressure, the management of Luckin Coffee admitted to fraudulent financial reports that were done without their knowledge and subsequently the stock cratered.
This, once again, put the bad business practices of Chinese companies into the spotlight. Worse, Luckin Coffee was no small business at that point and its ADR was widely traded, leading many investors getting burned in the process.
With the reverse merger frauds still fresh in investors’ minds, many called for increased regulatory scrutiny of all Chinese listed companies. That, coupled with increased geopolitical tensions between the United States and China, were critical in former president Donald Trump’s executive order which delisted different Chinese companies from American stock exchanges.
That’s not to say that every Chinese ADR is a fraud. Almost all of China’s largest and most successful companies — including Alibaba, Baidu, and Tencent — trade on American exchanges in the form of ADRs and have presented great growth for investors. Of course, large companies with an international presence like Alibaba have a much smaller risk of being fraudulent.