Authored by Dhaval Jain & Surya Jain, students of PGDM
2019-21 program, Great Lakes Institute of Management, Gurgaon.
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| Beijing, China (Representative Image) |
“Let
China sleep, for when she wakes, she will shake the whole world,” a
statement given by the French emperor Napoleon Bonaparte around 200 years ago.
Who knew these words would sound increasingly more prescient, in the current
times and would result in a prophecy that nobody saw coming.
China sleep, for when she wakes, she will shake the whole world,” a
statement given by the French emperor Napoleon Bonaparte around 200 years ago.
Who knew these words would sound increasingly more prescient, in the current
times and would result in a prophecy that nobody saw coming.
On 21
May 2020, the US Senate passed a bill that can potentially bring down Chinese
companies listed on the U.S stock exchange. The bill is titled as ‘Holding
foreign companies Accountable act’ which requires a foreign company to comply
with PCAOB audits for consecutively 3 years and also requires to disclose
whether they are owned or controlled by foreign governments.
May 2020, the US Senate passed a bill that can potentially bring down Chinese
companies listed on the U.S stock exchange. The bill is titled as ‘Holding
foreign companies Accountable act’ which requires a foreign company to comply
with PCAOB audits for consecutively 3 years and also requires to disclose
whether they are owned or controlled by foreign governments.
So
who exactly is this bill for, is it just directed at china, is it a response of
the US govt. amidst the ongoing trade war, or is it the response to make sure
that china pays for its mistakes for mishandling and not alarming the world
about the coronavirus in its due course of time. Let’s find out.
who exactly is this bill for, is it just directed at china, is it a response of
the US govt. amidst the ongoing trade war, or is it the response to make sure
that china pays for its mistakes for mishandling and not alarming the world
about the coronavirus in its due course of time. Let’s find out.
As
the world was recovering from the global financial crisis of 2008, a new fraud
was being engineered, the centre of which was based in China. The investment
firms in the US were trying to find new avenues to get higher returns for their
clients while earning money for themselves. During this time, China was
booming, it was an exploding market with a lot of confidence, it was going to
be the largest economy in the world in near future and it was the perfect time
to invest in it. Investment firms in the US started to define it as the gold
rush and started selling opportunities to Americans by making them participate
in what they termed as the “China Growth Story”.
the world was recovering from the global financial crisis of 2008, a new fraud
was being engineered, the centre of which was based in China. The investment
firms in the US were trying to find new avenues to get higher returns for their
clients while earning money for themselves. During this time, China was
booming, it was an exploding market with a lot of confidence, it was going to
be the largest economy in the world in near future and it was the perfect time
to invest in it. Investment firms in the US started to define it as the gold
rush and started selling opportunities to Americans by making them participate
in what they termed as the “China Growth Story”.
However,
foreigners could not invest in Chinese markets directly, and this is where the
investment firms came in and played a huge role. They started to list the
Chinese companies on US stock exchanges allowing domestic investors to take a
piece of the China growth story. A listing of a company on the exchange
required audits and public vetting, however, the investment firms found a
loophole called a reverse merger. So any Chinese company who wanted to get on
US stock exchange merges with a shell company in the US that no longer operates
but still legally exists and have a listing on the exchange. Once the merger is
done, the Chinese company simply takes the place of Shell Company in the market
and now investors like you and me can simply buy it. Between 2006 and 2012
around 400 Chinese companies were listed on US exchange, 80% of which was
reverse mergers.
foreigners could not invest in Chinese markets directly, and this is where the
investment firms came in and played a huge role. They started to list the
Chinese companies on US stock exchanges allowing domestic investors to take a
piece of the China growth story. A listing of a company on the exchange
required audits and public vetting, however, the investment firms found a
loophole called a reverse merger. So any Chinese company who wanted to get on
US stock exchange merges with a shell company in the US that no longer operates
but still legally exists and have a listing on the exchange. Once the merger is
done, the Chinese company simply takes the place of Shell Company in the market
and now investors like you and me can simply buy it. Between 2006 and 2012
around 400 Chinese companies were listed on US exchange, 80% of which was
reverse mergers.
Everything
was going well, investors were making money, investment banks would make huge
money in brokerage, until a group of investors decided to investigate these
Chinese companies before putting their money. One of the companies they
investigated was Orient paper, they went out to their main manufacturing
facility in China only to realise that the company was a fraud. There was no
activity done in their units, no trucks, no raw materials, it was a complete
disaster. On further investigation they realised, they had claimed a 100-million-dollar
revenue which was almost 40 times more than what they were making. Although,
orient paper was not alone, there were other companies too, one after the
other.
was going well, investors were making money, investment banks would make huge
money in brokerage, until a group of investors decided to investigate these
Chinese companies before putting their money. One of the companies they
investigated was Orient paper, they went out to their main manufacturing
facility in China only to realise that the company was a fraud. There was no
activity done in their units, no trucks, no raw materials, it was a complete
disaster. On further investigation they realised, they had claimed a 100-million-dollar
revenue which was almost 40 times more than what they were making. Although,
orient paper was not alone, there were other companies too, one after the
other.
Soon
they realised that it is an enormous fraud, the Chinese companies were
fabricating their financial statement in the filings with SEC. Typically they
would be making only 1/10th of revenue they claimed to US investors which was
revealed after comparing it with their filings with the Chinese government.
When this news started to come out, these stocks would crash, and eventually
would get delisted from the US stock exchange. US investors would be left with
a large amount of worthless stock resulting in losses of billions of dollars.
Very recently, around a month back, Luckin coffee a Chinese company came into
light due to their accounting fraud and their shares plummeted by 80%.
they realised that it is an enormous fraud, the Chinese companies were
fabricating their financial statement in the filings with SEC. Typically they
would be making only 1/10th of revenue they claimed to US investors which was
revealed after comparing it with their filings with the Chinese government.
When this news started to come out, these stocks would crash, and eventually
would get delisted from the US stock exchange. US investors would be left with
a large amount of worthless stock resulting in losses of billions of dollars.
Very recently, around a month back, Luckin coffee a Chinese company came into
light due to their accounting fraud and their shares plummeted by 80%.
 |
| Dhaval Jain |
Humans
generally tend to learn from their past mistakes and experiences, however, even
a global financial crisis could not make them realize that, where thousands of
people lost their lifetimes savings, their homes, faced bankruptcy, even death
and eventually they found themselves in the same hole once again. America lost
to an estimated $14,000,000,000 to reverse merger frauds, mind that this is
just after the global financial crisis.
generally tend to learn from their past mistakes and experiences, however, even
a global financial crisis could not make them realize that, where thousands of
people lost their lifetimes savings, their homes, faced bankruptcy, even death
and eventually they found themselves in the same hole once again. America lost
to an estimated $14,000,000,000 to reverse merger frauds, mind that this is
just after the global financial crisis.
Who
should be held responsible for this, is it the Chinese companies, the
governments or the gatekeepers in America who are driven by greed and money?
Well, this is a drawback of capitalism which we all have to live with.
should be held responsible for this, is it the Chinese companies, the
governments or the gatekeepers in America who are driven by greed and money?
Well, this is a drawback of capitalism which we all have to live with.
Even
after years of fraud, the US govt. didn’t do anything until now. Well, one of
the largest economies could also not save itself from this animal called
bureaucracy. It took a trade war and a global pandemic for them to realise to
protect the American investors, their household savings, their pensions from
these fraud Chinese companies listed on US stock exchange and hence the law.
after years of fraud, the US govt. didn’t do anything until now. Well, one of
the largest economies could also not save itself from this animal called
bureaucracy. It took a trade war and a global pandemic for them to realise to
protect the American investors, their household savings, their pensions from
these fraud Chinese companies listed on US stock exchange and hence the law.
The
rise of China is not just limited to take head-on with America but going
against everyone in their efforts to become the next superpower. China is at
war with everybody.
rise of China is not just limited to take head-on with America but going
against everyone in their efforts to become the next superpower. China is at
war with everybody.
 |
| Surya Jain |
While
the world was fighting with the Covid-19 pandemic, China started to give
troubles to their neighbours. China has increased its activities in the South
China Sea by creating lands and runways for themselves. To give a perspective,
South China Sea is surrounded by 8 countries, China & Taiwan (North),
Indonesia & Brunei (South), Vietnam, Malaysia & Singapore (West) and
Philippines (East) and all of them claim a right over it, although in different
proportions.
the world was fighting with the Covid-19 pandemic, China started to give
troubles to their neighbours. China has increased its activities in the South
China Sea by creating lands and runways for themselves. To give a perspective,
South China Sea is surrounded by 8 countries, China & Taiwan (North),
Indonesia & Brunei (South), Vietnam, Malaysia & Singapore (West) and
Philippines (East) and all of them claim a right over it, although in different
proportions.
So
why is China so interested in South China Sea? The answer is very simple, to
gain world dominance and achieve economic superiority. You might ask how
exactly a sea will help gain dominance. There are particularly 3 reasons for
it. First, the South China Sea has a large amount of reserves of crude oil
(12,500 Cr barrel), and natural gas (500 Lakh Cr cubic feet).
why is China so interested in South China Sea? The answer is very simple, to
gain world dominance and achieve economic superiority. You might ask how
exactly a sea will help gain dominance. There are particularly 3 reasons for
it. First, the South China Sea has a large amount of reserves of crude oil
(12,500 Cr barrel), and natural gas (500 Lakh Cr cubic feet).
Second,
more than 3 trillion dollars’ worth of trade passes through the South China
Sea, to give context, India’s GDP is ~2.8 Trillion Dollars, 30% of global crude
oil and 40% of global Natural gas passes through the South China Sea. Third, is
the fishing industry, 10% of the global consumption of fish is sourced through
this sea.
more than 3 trillion dollars’ worth of trade passes through the South China
Sea, to give context, India’s GDP is ~2.8 Trillion Dollars, 30% of global crude
oil and 40% of global Natural gas passes through the South China Sea. Third, is
the fishing industry, 10% of the global consumption of fish is sourced through
this sea.
China
claims more than 80% of this sea and is dominating the surrounding countries
through its bullying power. The reasons for this claim by China attributes to
73-year-old map which shows 9 lines around the South China sea popularly known
as the Nine-Dash line (Most of these reserves are within the Nine dash line)
and all the area within these lines is claimed to be owned by them (China)
although the remaining the countries don’t agree to this and this is the main
reason for dispute in South China sea. China claims to the extent of owning all
the islands within the sea and even flights passing through South China should
take permission from them which is against the International lawโs.
claims more than 80% of this sea and is dominating the surrounding countries
through its bullying power. The reasons for this claim by China attributes to
73-year-old map which shows 9 lines around the South China sea popularly known
as the Nine-Dash line (Most of these reserves are within the Nine dash line)
and all the area within these lines is claimed to be owned by them (China)
although the remaining the countries don’t agree to this and this is the main
reason for dispute in South China sea. China claims to the extent of owning all
the islands within the sea and even flights passing through South China should
take permission from them which is against the International lawโs.
The
actions of China do not end here. China has overwhelmingly approved a plan that
allows it to impose new laws on Hong Kong. The controversial National security
law will bypass the Honk Kong legislature as a result of which protesters &
police, have already started clashing in Hong Kong, as thousands took to the
streets to push back against this law. Critics say this could erode Hong Kong’s
autonomy, remove right to free speech and violates the freedoms promised under Hong
Kong’s special ‘one country, two systems’ status. Hong Kong with its consistent
efforts, has refused to be in the grip of the communist party and are trying to
make sure democracy lives on their land.
actions of China do not end here. China has overwhelmingly approved a plan that
allows it to impose new laws on Hong Kong. The controversial National security
law will bypass the Honk Kong legislature as a result of which protesters &
police, have already started clashing in Hong Kong, as thousands took to the
streets to push back against this law. Critics say this could erode Hong Kong’s
autonomy, remove right to free speech and violates the freedoms promised under Hong
Kong’s special ‘one country, two systems’ status. Hong Kong with its consistent
efforts, has refused to be in the grip of the communist party and are trying to
make sure democracy lives on their land.
However,
it’s the first time too, we are seeing a global backlash against China.
Countries are getting hesitant working with the Chinese companies; countries
are calling out for inquiries and investigation regarding the origin of the
virus. Everybody is seeking to punish China and believes the country owe
reparations. Even after the criticism faced, china has not been receptive and
rather fierce in their public relations. Let’s see for how long this backlash
against china builds and to what extent the People’s Republic of China will go
to make sure its supremacy. Only time will tell.
it’s the first time too, we are seeing a global backlash against China.
Countries are getting hesitant working with the Chinese companies; countries
are calling out for inquiries and investigation regarding the origin of the
virus. Everybody is seeking to punish China and believes the country owe
reparations. Even after the criticism faced, china has not been receptive and
rather fierce in their public relations. Let’s see for how long this backlash
against china builds and to what extent the People’s Republic of China will go
to make sure its supremacy. Only time will tell.
(Dhaval Jain & Surya Jain are students of PGDM
2019-21 program at Great Lakes Institute of Management, Gurgaon. Views expressed in the article are of the authors.)
2019-21 program at Great Lakes Institute of Management, Gurgaon. Views expressed in the article are of the authors.)
