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Could the ‘China Hustle’ Law End the Big Short?
U.S.-listed Chinese companies will have to open up — or leave the country.
Soon there may be fewer alleged Chinese frauds listed on U.S. exchanges that short-sellers can drool over. But Dan David, the short-seller who lobbied Congress for years in an effort to kick such companies out of U.S. capital markets, doesn’t care.
Even if Chinese frauds disappear from the landscape, “a lot of American companies commit fraud,” shrugs David, the founder of short-selling firm Wolfpack Research and a leading protagonist in the documentary, “The China Hustle.” The film details his battle with Congress — and the unscrupulous Chinese corporate practices that spawned it.
In 2012, David began his campaign to educate lawmakers about Chinese companies who sell their shares in the U.S. to allegedly lure American investors into frauds with no repercussions. He started by writing letters to the U.S. senators of his home state of Pennsylvania, Republican Pat Toomey and Democrat Bob Casey.
“Other shorts were pissed at me because this is low-hanging fruit and they said I was fucking it up,” he told Institutional Investor on December 2, the day the U.S. House of Representatives voted – in a rare unanimous, bipartisan manner — in favor of legislation that would force Chinese companies to open up their audit books to U.S. regulators or face delisting from the exchanges.
Because of their Chinese ownership, until now these companies have been able to avoid the U.S. requirement that companies be audited by Public Company Accounting Oversight Board-inspected accounting firms in order to sell shares in the U.S.
David said, for example, that Deloitte couldn’t “send that audit paper to the U.S. The Chinese communist party won’t allow it.”
The new legislation is “a good first step toward getting some kind of financial parity between us and China,” said David, who says he made “five or six” trips to visit various congressmen since 2014 in an effort to drum up interest in the subject.
“It’s not illegal for Chinese citizens to steal from American citizens,” David said he told the lawmakers — who seemed surprised to learn that even if fraudulent Chinese companies get shut down in the U.S., their chief executive officers can never be prosecuted here because the U.S. has no extradition treaty with China. (The new law won’t change that.)
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Many short-sellers have typically focused on smaller Chinese companies they believe are frauds, and several — including Muddy Waters’s Carson Block and David — have made their reputation bringing them down. But there are also huge Chinese companies listed on U.S. exchanges, adding up to a market capitalization of more than $1 trillion, explained David.
Chinese e-commerce giant Alibaba Group Holding, which was the largest initial public offering ever in the U.S. when it debuted in 2014, has a market value of around $720 billion. Baidu is valued at about $50 billion, NIO at more than $60 billion, and Pinduoduo at about $180 billion.
David suspects these companies will pull their U.S. listings and go elsewhere rather than open up their books to U.S. regulators. Alibaba, for example, is dually listed in the U.S. and Hong Kong.
The new law started out as a bill in the U.S. Senate, where it passed unanimously in May before finally being taken up in the House. It will become law once signed by President Donald Trump, which is expected. Chinese companies will have three years to comply before being booted from the exchanges.
The original bill was introduced by Republican Senator Marco Rubio of Florida — one lawmaker whom David had never talked with about his concerns but who took up the cause.
“The first time Rubio ever mentioned this was in a tweet,” recalled David. “He said he was going to work on legislation to stop the China hustle.”
The 2017 documentary of the same name, co-produced by Alix Gibney and Mark Cuban, stars short-sellers David, Block and Jim Chanos and is available on Netflix.
Says David: “Maybe he saw it.”