Luckin Coffee shows how risky Chinese IPOs can be, but investors are just not listening

It was less than a decade ago that a series of scandals involving Chinese companies going public in the U.S., some through reverse mergers, blew up — resulting in…

billions of investor dollars lost.

Undeterred, investors have dumped billions more into Chinese companies in recent years, even as shareholder advocates such as the Council of Institutional Investors — and this columnist — have repeatedly pointed to the inherent dangers of stocks with little visibility or recourse for investors who are wronged.

Just last month, history repeated itself when Luckin Coffee blew up publicly, after admitting that a top executive inflated sales figures at the biggest rival to Starbucks in China. Luckin’s inflated numbers were initially exposed in an anonymous short-seller report that was made public in February by Muddy Waters Research — the same short seller that shone a light on some of the problematic Chinese companies nearly 10 years ago, including Sino-Forest.

As other Chinese stocks sank at the time, and investigations here and in China began; the Securities and Exchange Commission issued a warning to all investors about such stocks that boiled down to: “Buyer beware.”

Yet the lesson does not seem to have sunk in even now. As a pandemic washes across the globe and freezes much financial activity, another Chinese company managed to go public last week at a multibillion-dollar valuation that pulled hundreds of millions of dollars from the U.S. to China.

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