The Implications of Banning IPOs Linked to China
In recent news, the online clothing retailer Shein, closely linked to China, has announced its intentions to pursue an initial public offering (IPO) in the United States. However, this move has raised concerns among investors and lawmakers due to the potential risks associated with investing in a company based in an adversary country. There are suspicions that the Chinese Communist Party (CCP) may exert control over Shein and exploit the company for its own gain.
The fact that Shein’s CEO, Donald Tang, reportedly visited Beijing to seek permission for the IPO raises questions about the regime’s influence over the company. It is uncertain what concessions Shein may have made in exchange for this permission, and whether the CCP will require representation within the company or access to private data, including information about Shein’s U.S. customers.
This situation serves as a cautionary tale for potential Shein investors, as we have seen similar cases in the past. For instance, DiDi, a ride-hailing company, experienced a significant drop in value after Beijing imposed regulations that rendered it unprofitable. Within a year of its IPO, DiDi’s valuation plummeted by approximately 80 percent. This pattern of “hostage capitalism” has been observed throughout history, with the CCP engaging in targeted overregulation and taxation to exploit international investors.
As a result, U.S. investors have become wary of Chinese IPOs. Since the crackdown on Chinese companies in 2022, the market for first-time share sales by Chinese firms has essentially closed in the United States. Senator Marco Rubio has called for enhanced disclosures from Shein and even suggested potentially blocking the listing.
In response to political resistance in the U.S., Shein’s CEO has explored the possibility of listing in London instead. This move may be an attempt to pressure U.S. partners into influencing the Securities and Exchange Commission (SEC) to relax its requirements. However, London’s stock exchange is currently struggling and is desperate for a high-value IPO like Shein’s. The UK government is actively courting Shein and may be willing to compromise its own rules to secure the listing.
Allowing a China-linked company to list in the U.S., UK, or any of our allies tarnishes our reputations in exchange for legitimizing a company that may deceive naive investors. The potential risks associated with investing in Shein include legal and supply chain disruptions, dependence on loopholes in U.S. tariffs that may soon close, and the possibility of Beijing confiscating parts of the company in the future.
Shein has also faced allegations of copying fashion designs and benefiting from slave labor in Xinjiang. These controversies could lead to a ban on the company, similar to what happened with DiDi, or make it unprofitable in the United States and among our allies. Any of these contingencies would significantly impact shareholder value.
Despite these risks, Wall Street is eager to be involved in Shein’s IPO due to the potential financial gains. Investment banks such as Goldman Sachs, JP Morgan, and Morgan Stanley have been appointed as underwriters for the deal. However, assisting a geopolitical adversary like China is not in the best interest of U.S. national security.
In conclusion, the implications of banning IPOs linked to China are significant. It is crucial for leading exchanges like New York and London to cooperate and establish a mechanism to ban China-linked IPOs. This coordinated action would protect market democracy and mitigate the risks associated with investing in companies closely tied to the Chinese Communist Party. As we have seen in the past, failure to address these concerns could lead to severe consequences for investors and undermine our national security.
