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there’s a new ‘China Hustle’ · TechNode


“The China Hustle,” a documentary from a few years back, depicts a special type of stock market fraud. Obscure Chinese high-tech manufacturers, agricultural producers, and mining companies would list on overseas stock exchanges. Investor conferences, investment funds, and stockbrokers played up each company’s connection to China’s growth miracle, stimulating investor demand and precipitating share price spikes.

Trouble is, many companies were cooking the books, with eye-watering revenue growth stemming from a web of fraud. As the real value of these huckster companies came to light, stock prices tumbled, and naïve investors were left holding the bag. All up, over 200 Chinese companies were found to have engaged in some kind of China hustle, resulting in $50 billion in securities fraud. 

Some years later, Luckin Coffee’s multi-billion-dollar collapse alerted investors to the prospect of a new kind of hustle. A recent string of short reports, fraud admissions, and lawsuits have reinforced these fears. In fact, I’d go as far as to say Luckin’s the tip of the iceberg. We face a “New China Hustle” of falsified growth and management acting in bad faith. 

Opinion

Michael Norris is a TechNode Contributor and Research and Strategy Manager at AgencyChina. He has the financial sense not to hold or short stocks of any of the companies mentioned in this article.

Digital fraud

“New China Hustles” don’t involve manufacturers, agricultural producers, or mining companies engaged in the physical economy. Instead, these hustlers involve digital economy actors like digital advertisers, online education providers, and consumer commerce companies. 

Take the recent fraud admissions from Luckin Coffee and TAL Education Group, respectively a digital-first coffee vendor and an education provider with a swag of online-only sub-brands. In both instances, fessed-up fraud involves inflated online purchases. Mobile gaming company Cheetah Mobile and online tuition provider GSX are staring down the barrel of shareholder lawsuits about inflated user numbers and sham revenues.

Why the sudden tech angle?

Investors know technology and internet stocks have outperformed the market. That breeds comfort with these stocks’ high-risk, high-reward growth profiles—scale first, profits later. This leeway suits hustlers well. 



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Written by Aakash Malu

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