Ban China-Linked IPOs

Guests attend SHEIN X Art Discovery Project in El Monte, Calif., on Sept. 17, 2022. Presley Ann/Getty Images for SHEIN

Commentary

Shein, the online clothes retailer closely linked to China, is attempting a U.S. initial public offering (IPO). Relatively naive international investors could pump as much as ten billion dollars into a company largely based in an adversary country. Large parts of the company could then be taken by the regime in Beijing.

In the context of a secret filing for a New York IPO in November, Shein CEO Donald Tang reportedly visited Beijing to kiss the ring and obtain permission. This was necessary to comply with Chinese laws, including for foreign companies that mostly operate from the communist country. Thus far, Beijing has reportedly withheld permission from Shein.

The Chinese Communist Party’s (CCP’s) permission requirement for a supposedly Singaporean company raises questions about how much control the regime has over Shein, what it asks in exchange for permission, and whether Shein has already made secret concessions.

Will Beijing require that Shein maintain CCP representation in the company, for example, including on the board?

Will the regime get illicit access to private data, including about Shein’s U.S. customers?

What exactly is the opaque ownership structure of Shein, its Chinese subsidiaries, and its many sub-brands?

When buying shares of Shein, how certain can shareholders be that the subsidiaries and brands upon which its value depends will never be decoupled by Beijing from the parent company? (They can’t.)

Sen. Marco Rubio (R-Fla.) asked in a Feb. 15 letter that the Securities and Exchange Commission (SEC) require enhanced disclosures from Shein and potentially block the listing.

“SHEIN’s collaboration with Chinese regulators raises serious doubts that its IPO filings are complete and accurate,” he wrote to the commission’s chairman. “As I have written to you in the past, those very regulators order Chinese companies to deceive U.S. authorities and investors about the risks of doing business in the PRC [People’s Republic of China].”

A cautionary tale for potential Shein investors is DiDi ride-hailing stock that tanked after its 2021 U.S. IPO raised $4.4 billion. The company was once valued at $80 billion. Then, Beijing started to regulate DiDi into unprofitability. The company’s valuation dropped by approximately $64 billion, or 80 percent, within a year of the IPO.

Many other historical examples of “hostage capitalism” stretching back to the 1949 Chinese revolution include CCP theft from international investors through targeted overregulation and taxation.

U.S. investors are now shy, but not shy enough. “US IPOs by Chinese companies have mostly been small and rare in the years since Didi Global Inc. was forced off the boards in New York [in 2022], part of a crackdown that essentially closed the market to first-time share sales by Chinese firms,” according to Bloomberg on Feb. 26.

Political resistance to the Shein IPO led its CEO to discuss a listing in London instead—perhaps to scare its U.S. partners into using their influence with the SEC to relax its requirements. London has fewer investors than New York, so the IPO would likely attract less capital.

London’s stock exchange has seen better days, and it’s desperate for an IPO like Shein that could attract as much as $10 billion or more and become the city’s biggest listing ever. The UK government is actively courting Shein and could compromise its own rules to get the listing. Craig Coben of the Financial Times asked on Feb. 28, “Does the UK have a chance or is it setting itself up for another embarrassment, as happened when it rejigged its listing rules in 2018 in a forlorn attempt to lure Saudi Aramco?”

Letting a China-linked company list in the United States, United Kingdom, or any of our allies besmirches U.S. and allied reputations in exchange for giving the company an imprimatur of legitimacy that will fool naive investors. It’s a lose-win proposition, and we are the losers.

Shein’s target valuation for the IPO is reportedly $80 billion to $90 billion, substantially above its $50 billion value implied by recent private trades. The real value could be less if the CCP manages to strip the company of assets after the IPO, as it did to Evergrande before.

Yet Wall Street would get a small cut from the listing, and so is in favor. According to Sky News, Goldman Sachs, JP Morgan, and Morgan Stanley were appointed to the deal. Underwriters for deal sizes greater than $1 billion typically make 3.5 percent, which explains why Wall Street wants American investors to send their money to China. Deal flow generates bank revenue regardless of whether the deals are good or result in the fall of democratic civilization.

This kind of Wall Street assist to a geopolitical adversary, at best, and a terrorist state, at worst, is not in U.S. national security interests. For this reason and others, investing in China-linked companies is now subject to considerable extraordinary risks, including legal and supply chain disruptions, dependence on loopholes in U.S. tariffs that could soon close, and whether Beijing will confiscate chunks of the company in the future.

Shein has been accused of copying fashion designs and is suspected to have benefited from slave labor in Xinjiang. Ultimately, Shein could be banned, forced off U.S. exchanges (like DiDi), or made unprofitable in the United States and among our allies. Any of these contingencies would put significant downward pressure on shareholder value, to say the least. Knowing this could be one reason that existing private Shein owners want to sell to the American public, who they likely see as suckers.

Just as in the prisoner’s dilemma game, in which both prisoners sell each other out and thus get suboptimal outcomes compared to cooperation, a London IPO would be a sellout of market democracy for short-term profits accrued by a few banks.

Some forcing mechanism—like G7 legal coordination—is required so that New York, London, and other leading exchanges cooperate by banning China-linked IPOs. We ban commerce with terrorists, so we can ban commerce with what is arguably the greatest terrorist threat of all: the Chinese Communist Party.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.