Soft City guidelines for Beijing’s corporations ‘primed for catastrophe’

Weakening the UK’s auditing rules to let Chinese companies list on the London Stock Exchange is ‘primed for disaster’, an expert has warned.

The Financial Reporting Council (FRC), Britain’s accountancy watchdog, announced last week that it was considering softening its regulations so that Chinese companies would be able to use accounting standards from their home country if they listed in London, rather than having to abide by the UK’s stricter rules.

It comes as ministers and regulators attempt to boost the competitiveness of Britain’s stock market due to fears it is failing to convince companies to list in London rather than in the US or other markets.

But Fraser Howie, a former investment banker who spent 30 years working in the Chinese and Asian stock markets, told The Mail on Sunday that the FRC’s move risked opening British investors up to enormous risks due to the opaque nature of Chinese firms and their bookkeeping practices.

‘The idea to lower our standards for Chinese companies makes no sense at all,’ Howie said. ‘Chinese firms have a long history of listing and then committing fraud and telling outright lies.’

He cited examples such as Sino-Forest Corporation, which claimed to be one of the biggest forest planting firms in China and was listed on the Toronto Stock Exchange before going bust in 2012.

Delisted: Luckin Coffee was touted as the Chinese equivalent of Starbucks

Its collapse followed allegations of fraud, with Canadian regulators concluding in 2017 that the firm had engaged in ‘deceitful or dishonest conduct’ regarding the size of its sales and the value of its assets.

But it is not the only accounting scandal to have engulfed a Chinese firm that has listed on a Western stock exchange. In 2020, Xiamen-based chain Luckin Coffee, once touted as a Chinese rival to Starbucks, was slapped with a £135 million fine by US regulators after revealing that £250 million of sales did not exist. The scandal forced the company to delist from the Nasdaq stock exchange just over a year after its debut on Wall Street in 2019.

Howie, who in the late 1990s worked for Beijing-based investment bank China International Capital Corporation, said ‘the scale of the fraud and the lies you come across in China is significant’ adding that making it easier for Chinese companies to list in London was unlikely to provide a big boost to the UK market.

‘There is no evidence that lowering standards has worked in the past,’ he said. ‘And allowing these companies to list in London is giving them a sort of seal of approval.

‘I think it is just primed for disaster. Retail investors and institutions will be presented with these companies as a way to play the Chinese economy, but they will eventually find that they have been sold a pack of lies. Thinking this is a solution to a problem we have is extremely naïve.’

Scrutiny of Chinese firms’ business practices was taken up a level last week when European Union regulators said they were opening an investigation into online fashion giant Shein following reports it was selling items on its website in breach of European law including child-like sex dolls and weapons.

Sam Goodman, senior policy director of the China Strategic Risks Institute think-tank, said: ‘The ongoing EU and French investigations into Shein and the experience of the US, where several Chinese companies were previously delisted for poor auditing standards, all demonstrate why these changes from the FRC would be a bad idea.’

Goodman added: ‘Rather than engaging in a race to the bottom for auditing standards and transparency, the Government should want the City of London to be a world leader.’