Editorial | Luckin Coffee affair sours US and China ties further

Once billed as the mainland coffee chain that would beat Starbucks in China, the debacle comes at a sensitive time when China and the United States are at loggerheads and investor confidence in US-listed companies from the mainland is low.

The scandal was just waiting to happen and is the result of a bubble in China’s internet/e-commerce frenzy, where pie-in-the-sky business models were promoted and propped up by venture capital and private equity. The length and extent of the alleged fraud means it was likely to be systematic. The business had no chance of ever making money, as practically every drink was subsidised, with no way of turning customer “loyalty” into real profits. The surprise is that it had gone on for so long, and that many institutional investors such as Singapore’s GIC, the Qatar Investment Authority and New York Life Insurance were persuaded to invest.

At a time of heightened distrust and deteriorating relations between the US and China, the Luckin Coffee scandal is playing into the narrative that Chinese companies are untrustworthy, and mainland-tainted ventures should be excluded from Wall Street.

The State Administration for Market Regulation in Beijing and the China Securities Regulatory Commission are both investigating, as is the US Securities and Exchange Commission. But the probes are being hampered by cross-border jurisdiction. The alleged fraud took place in China but the SEC has primary investigative responsibility.

Normally, a practical solution is for regulators to work together and share information. For a long time, both countries believed getting Chinese companies listed on Wall Street was mutually beneficial. That is no longer the case. America’s mistrust of China has extended to its companies. Unfortunately, politics has taken the front seat in Chinese business in America.