International Investment in Chinese Enterprises Facing New Changes

 
The fallout from Luckin Coffee’s fraud is still brewing, and it has now accelerated the disengagement of the financial industry chain between China and the United States. According to the latest news, the Nasdaq Stock Exchange informed Luckin that it had to delist. In addition, the Nasdaq said it would announce new restrictions on initial public offerings (IPO), a move that would make it harder for some Chinese enterprises to list on the exchange. It also marks the end of the U.S.-China venture capital honeymoon that began at the end of the last century, as predicted by ANBOUND.
 
Nasdaq's new listing rules, on the one hand, raise the financing threshold for an IPO, and on the other hand, require the IPO’s corporate accounts to comply with international accounting standards. This will keep more China's start-ups out of the U.S. market and bring about further "backflow" of Chinese enterprises listed on the mainboard in New York. In effect, this would sever the financial chain through which American capital had previously invested in Chinese enterprises. The process of Chinese enterprises going public in the United States is actually the process of American venture capital taking China's huge consumer market and consumer population as the investment theme and prompting American investors to invest in Chinese enterprises. Nowadays, this financial chain is increasingly unacceptable to financial investors in the United States as accounting fraud by some Chinese enterprises and strategic competition between China and the United States intensifies. The chairman of the U.S. Securities and Exchange Commission has publicly warned about the risks of investing in China concepts stock. In this case, the trend of "backflow" of China concepts stock would be further intensified in the future.
 
However, the investment theme of the Chinese market actually remains. The rapid development and maturity of Chinese concept stocks such as Alibaba (NYSE:BABA) and Meituan have proved the scale and potential of China's consumer market. These enterprises that perform well remain attractive to international capital, including U.S. investors. The value discovery of the U.S. financial industry in the field of capital and the professionalism of corporate governance are still indispensable media for the growth and development of Chinese enterprises. Therefore, in the future, China needs to try new models of international investment in Chinese enterprises and establish a new international pattern of financing for Chinese enterprises.
 
This requires China to be more open to the international financial sector and to avoid "decoupling." It is only through this that Wall Street can take root in China and provide more specialized and systematic financial services to Chinese enterprises. While China has been increasing its efforts to open up its financial services sector and bring more international investment banks, asset management, and insurance institutions into the country, Chinese enterprises still lack close ties and trust with international financial institutions. This requires greater integration of the business environment and the legal environment with the international market. Not only the rules related to the capital market need to be improved, but also the development of market regulations on business administration, taxation, and accounting. This is not only conducive to the establishment of a modern enterprise system for Chinese enterprises, but also to the long-term and stable development of Chinese enterprises. For example, the current system of different rights for the same shares on Nasdaq has been accepted by Hong Kong Stock Exchange (HKEX), and the relevant enterprises can also be included in the Hang Seng index. In this regard, the Mainland Chinese A-share market could also further relax the relevant restrictions to encourage more enterprises to list on the mainland. In addition, the reform of the listed enterprises’ accounting system can also be boldly promoted to integrate with the international system, so as to increase the transparency and trust of Chinese enterprises.
 
At the same time, China also needs more international capital to participate in its capital market and establish a more effective financial resource allocation system. In particular, with the current loosening of global monetary policies, i.e., the "zero interest rates" and "negative interest rates," international capital still faces the demand of pursuing investment returns and diversifying investment risks. In other words, Chinese enterprises need international professional investment institutions’ participation in the Chinese market, so as to attract not only domestic, but also international investors. Under such circumstances, the reform and improvement of China's capital market are even more important. An open and transparent multi-level capital market needs to pay more attention to the protection of investors, enhance the respect for the market, and improve the legal system.
 
The opening of the capital market should take into account the new geopolitical pattern. Although the U.S. financial market is beginning to "decouple" from Chinese enterprises, China not only needs to strengthen the construction and layout of the Science and Technology Innovation Board (STAR), the Growth Enterprise Market (GEM) and the "New Third Board" in the domestic market, but also improve the quality and depth of the capital market in order to attract international capital. At the same time, China's capital account has not been fully opened and the RMB exchange rate has not been freely floating, there are still various restriction policies on foreign investment entering China. It is also necessary to consider establishing a convenient and transparent connectivity mechanism with the surrounding financial markets such as Hong Kong, Singapore, and Tokyo. So that international capital can invest and obtain returns within China’s geopolitical scope and thereby realize the "greenfield investment" effect of international capital in the financial field.
 
The Chinese central government mentioned the importance of capital market construction in the documents on the construction of the new market economy system. This can be said to be the top priority of China's future development. In this regard, the capital market needs not only to meet the needs of domestic investors, but also to attract international investors and international financial institutions so as to form a new pattern of investment and financing that is comprehensive and open.
 
Final analysis conclusion:
  Luckin's fraud incident reflects a series of shortcomings in China's market environment, legal environment, and capital market construction. This will accelerate the decoupling of the financial industry between China and the United States. In this context, China needs to push ahead with more market-oriented reforms and establish close links between Chinese enterprises and international capital