In the News: JPMorgan Mutual Fund Buyout; Luckin Coffee's Phony Sales; and US Tech Export Restrictions

On Apr. 1, foreign ownership limits in Chinese asset management firms were removed, in accordance with the timetable for eliminating foreign ownership caps in securities, futures, and asset management companies released in October 2019 by the CSRC. According to the CSRC, it has also received applications from U.S. money managers BlackRock and Neuberger Berman to set up mutual fund businesses in China. JPMorgan has sought to capitalize on China's accelerated opening up of the financial industry in recent months across several sectors. In December 2019, it became the first U.S. bank approved to launch a majority-owned local securities JV. It was also reported to have applied to take full control over its local futures JV. According to the Asset Management Association of China, total assets under management in China stood at RMB16.36 trillion ($2.31 trillion) as of February.

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Luckin Coffee reveals alleged financial fraud 

Chinese coffee giant Luckin Coffee has revealed that hundreds of millions of dollars of reported sales in 2019 were "fabricated." The coffee chain, which has been touted as Starbucks' main competitor in China, announced on Apr. 2 that an internal investigation has found an estimated RMB 2.2 billion ($310 million) worth of illegitimate sales from the second to the fourth quarter of 2019, almost half of expected total sales last year.

The Nasdaq-listed company has instructed investors to ignore previous financial statements. The news quickly led to the company's shares plunging almost 75%. The company's chief operating officer Jian Liu and several other employees have been suspended pending further investigation. China's securities regulator said that it will also be investigating the case the day after the revelations were made. Founded in 2017, Luckin Coffee has around 4,500 stores in China, more than Starbucks as of January 2020.

Luckin Coffee's $561 million IPO was the second biggest by a Chinese company in the U.S. in 2019, valuing the company at around $4.2 billion. At least 10 U.S. law firms have already begun investigations into the company, with several actively recruiting investors to join in class-action suits. The revelations will no doubt exacerbate concerns in the U.S. about the reliability of financial reporting among Chinese businesses looking to list there. In September 2019, it was reported that the U.S. government was considering delisting Chinese companies from U.S. stock exchanges. Moreover, a bill is currently making the rounds in Congress proposing to delist Chinese companies that fail to comply with U.S. financial disclosure requirements. Traditionally, Chinese companies refuse to disclose certain audit and financial information as they are considered state secrets under Chinese law. Bloomberg reports four investment bankers as saying that there is now likely to be a temporary ban on Chinese companies listing in the U.S. Even before the latest revelations surrounding Luckin Coffee, global banking giants were already increasingly reluctant to underwrite Chinese startups' IPOs in the U.S. due to growing geopolitical tension between China and the U.S., as well as poor performance by previous listings. 

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U.S. to tighten restrictions on high tech exports to China

The U.S. is tightening rules to prevent the use of advanced U.S. technology for military use by China, Reuters reports. Citing several anonymous sources, the report says that senior U.S. officials have agreed to, but not finalized, introducing three measures restricting Chinese access to U.S. radar equipment, semiconductors, and more.

Currently, a major consideration for authorizing U.S. technology exports is whether they will be used for civilian or military purposes. According to the report, the proposed changes would include the removal of that as a criterion for authorizing exports to China. Neither The White House nor the Commerce Department has confirmed the report.

The U.S. is also ramping up its restrictions of Chinese telecoms giant Huawei after it was blacklisted by the Trump administration in 2019. Reuters reports that the administration has agreed to new restrictions targeting Huawei's access to chips globally, by requiring foreign companies that use U.S. chipmaking equipment to obtain a license in order to continue supplying chips to Huawei. In January, the U.S. began requiring exporters of artificial intelligence (AI) software to be licensed, a move widely believed to be targeting China. These developments come on the back of growing tension between the two countries over trade and technological supremacy. In 2018, the U.S. passed the Export Control Reform Act, which tightened scrutiny over foreign investment in emerging and foundational technology and establishes permanent statutory authority for the U.S. Export Administration Regulations, the nation's export control laws.

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