Should You Worry About Fraud With Chinese Tech Giants?

Despite the growth opportunities in China, many investors consider the country off-limits in part because they don't trust Chinese companies' financial reporting. After Luckin Coffee was found to be a fraud, some investors reason that all Chinese stocks run a similar risk.

In this Backstage Pass segment, recorded on Aug. 23, Fool contributors Jeremy Bowman and Brian Withers discuss whether there's any merit to that argument and why large Chinese tech stocks are safer than companies like Luckin.

Brian Withers: These three that we've talked about -- Tencent (TCEHY 3.23%), JD.com (JD 2.61%), and Alibaba (BABA 2.92%) -- I think one of the other concerns from American investors is just, you know, are they telling us the truth? What about Luckin Coffee? Could that happen to these three? And I look at these -- these are stalwarts in the Chinese economy, and to me, I would be extremely surprised if there was anything untoward in their financials, just because of their place in the economy and just regular commerce.

Jeremy Bowman: Yeah. I don't think that's something that we really need to worry about with companies that are this large and entrenched in China. But that is a good point that you bring up. The other risks with some Chinese stocks, I know Alibaba's among them, is that the U.S. government is threatening to delist them if they don't comply with certain -- they don't allow, basically, U.S. regulators to look at their books, I think because of the situation you're describing with Luckin. So I don't think that's the kind of thing -- you don't want to see them delisted. I don't think that would affect the business directly, but from a shareholder value or investor perspective, it's not good for the stock.

Withers: Yeah. And going back, I know Ben Ra had posted some things -- he has a show on Motley Fool Live, as well as for those members that are Global Partners subscribers. Ben said it would be a mistake for the U.S. to delist these companies, and that was just his opinion. The other piece that I think Foolish investors should know -- it's not like this money is going to disappear overnight. It's not going to be like one morning you're going to wake up and your shares are going to be worth nothing. That's not the way it's going to happen.

Bowman: Yeah, that's a good point. These are real businesses, and I also think that even from the perspective of the Chinese government, it's not like they don't want Alibaba to succeed. I think, like, we're seeing in the U.S., certain antitrust measures. There's a real debate about what constitutes unfair competition and what's a monopoly. One of the things that Alibaba was fined for was forcing their vendors to only do business with them. And you know what? That sounds like a legitimate reason for a fine. I think if an e-commerce company, Amazon or somebody like that did that in this country, they'd probably be fined for it as well.

Withers: Yeah. The other thing that's interesting, and I'm pretty sure I have this right. I know that Tencent's been cooperating with the government for years. The government has built this, like, social score. Think of it as a FICO score plus your habits and making sure you don't play too many video games and that you get out and shop at the right places and all that kind of stuff. I know Tencent's provided data to the government. And I couldn't imagine if the U.S. government said to Apple, "Hey, we need all of your data for all of your customers." That just would not go anywhere, and so it's a very different environment over there.

Bowman: Yeah. That part of the culture of the government relationship is certainly a lot different, as far as data sharing and aligning yourself with the government initiatives there. That's a good point.