Chinese Companies Committing Fraud in US Markets

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by Tooup & cbus20122

Disclaimer: I am not attempting to give investing advice. While I do hold my own personal positions with a few of these companies, I am a relatively new trader and my positions amount to very little. My intention with this post is to spur discussion, while providing the insights I am basing my personal decisions on.


This is the most obvious stock committing fraud is Luckin Coffee the “Starbucks of China”. Luckin Coffee admitted to such, details can be found here.

Since January 2020 the stock has dropped from a $50 high to less than $2.00 per share where it currently sits.Link to additional DD


Muddy Waters Research highlighted many of the questionable accounting practices at LK and is now going after Chinese online educator GSX Techedu Inc. (GSX). The company is described as being, “a near total fraud”.

Muddy Waters states that 70% of users are fake and they believe the number of fake users could be as high as 80%. Source for this information and more information regarding their official position can be found here.

Link to Forbes article providing more information regarding this situation.


The “Netflix of China” has recently been found to be inflating user numbers and inflating advertising revenue while still posting hundreds of millions of losses (USD) in their 10th year of operation.

  • 60.3% of users are fraudulent, believed to be much higher with relatively low users rates in key areas of China and abnormally high users coming from remote countries (suspected bots).



BIDU is China’s version of Google. 30% of BIDU’s revenue comes from IQ and by proxy they have made this list. Forbes source for the revenue figure.

Other Notable Activity:


I am not aware of any fradulent activity with NIO. I just found it interesting that Goldman Sachs increased their holding of NIO Puts by 250% from quarter 4 2019 to quarter 1 2020. They now hold 2.2 million NIO puts. Sources for Goldman Sachs Group, Inc. holdings:

Source 1

Direct SEC fillings source


Honestly, until proven otherwise (which will never happen), I assume all Chinese stocks are fraudulent in one way or another.

That doesn’t mean they aren’t somewhat legit businesses. Enron was a legitimate business that just happened to inflate their #’s drastically. Most frauds are mostly real businesses that choose to not be honest in their reporting for the purpose of inflating stock price. I say this specifically due to the common narratives I see re: Alibaba, Tencent, and other large Chinese corporates that they “can’t” be frauds because they have legitimate businesses that are enormous.

There are ZERO incentives for these companies to NOT be fraudulent.

  • The punishment for fraud in China is akin to a slap on the wrist publicly
  • Privately, the Chinese gov’t likely encourages fraud because it encourages foreign inflows and investment of much needed dollars. Once that money flows through to China, the Chinese gov’t gives zero shits about the integrity of the company itself or anything else (that’s a problem for those who invested $ into these stocks).
  • Regulators are all Chinese owned, and there are zero checks and balances to assure that data is in fact correct and honest. Adding in these regulations would directly interfere with government goals and objectives while hurting the Chinese “growth” story. In other words, don’t count on this any time soon since all incentives towards regulation hurt China’s goals.
  • US investment banks and trading companies welcome Chinese stocks because they get fat bonuses for listing these companies and have very little drawback if the stock eventually gets filed as fraudulent. At the very worst, they can shrug their hands and just say that they got duped from the data themselves.
  • Chinese companies generally don’t pay dividends (only 30 of the 232 listed companies pay any dividend at all) so generally speaking, the foreign funds captured by Chinese frauds never truly has to go back to investors.
  • China’s economy is short US dollars, which it drastically needs for various reasons (purchasing the commodities that fund it’s export machine, buying food, buying energy, massive USD debt from their real estate developers, keeping their own currency balanced via large forex reserves, etc). In short, if anything, the incentive to attract inflows of foreign investment will only increase, and thus, the incentive for fraudulent activity to attract these inflows will also increase.
  • The Chinese corporate structure as listed on US exchanges (Variable interest entities) ensures that Chinese companies get all the funding, but stock owners have literally zero ownership of the companies themselves. It’s actually quite ridiculous that anybody has faith in any of these companies. It would be like purchasing a lotto ticket that has zero chance of winning because you don’t actually own the ticket itself, but you CAN sell the ticket to someone else. It’s the definition of a confidence game.



Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.


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