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If fast fashion group Shein succeeds become one of the UK’s largest public companies next year, no one can claim to be unprepared. Founded in China, headquartered in Singapore, rejected by American politicians and regulators, it has found a financial home in Britain.
Shein has yet to do so, despite vigorous efforts Donald Tangits executive chairman, to convince the UK of its bona fides. The listing regime in the UK was reformed this year to attract more high-growth founder-led companies and end the long drought suffered by the London Stock Exchange. This IPO is tempting, but it carries some risks.
Human rights activists are already vocally opposed, claiming that Shein is linked to labor rights violations in China and to cotton from its Xinjiang region. They insist it should not be allowed to list in the UK. Political control will intensify next year when a House of Commons committee is expected question Tang about his record.
There is much more that worries investors. Shein’s efforts to mollify Chinese regulators by transforming into a global company without openly criticizing the country where most of its clothes are made and where most of its 16,000 employees work could easily backfire. There will be no shortage of material in the risk factors section of the IPO prospectus.
But I don’t see enough reason for the Financial Conduct Authority to reject Shein’s listing, regardless of whether he deserves the £50bn valuation that would put him high on the FTSE 100 index. If Shein it wants to become a UK public company, with all the legal, media and financial scrutiny that entails, let it go ahead.
There is insufficient evidence to rule this out in a letter sent to the FCA by a law firm representing Stop Uyghur Genocide, which has campaigned to end the use of minority Uyghurs as forced labor in Xinjiang. The letter said it would be “irrational” for the UK regulator to approve it Shea’s listbut there is no obvious violation of the rules governing the financial markets.
Shein’s management of 5,800 contract factories where workers sew small batches of his orders to meet changing customer demands is, of course, relevant. It claims it sources all its cotton from outside China and that less than 2 percent can be traced back to Xinjiang. It also forces suppliers to sign a code of conduct and says it is withdrawing business from those who ignore it.
Its edge over UK fast fashion rivals is partly due to its low-wage network in China (it also has some factories in Brazil and Turkey). But its technology is also highly efficient, allowing it to fill orders quickly and work on demand with minimal inventory.
Reasons for caution remain. The cost arbitrage that Shein has built his business on may soon be squeezed. They may have to pay more to the factories retain workers in China and the tax advantage it gains by shipping orders directly to customers’ homes is threatened. The US is its biggest market and it needs to diversify production to deal with Chinese tariffs threatened by Donald Trump.
Shein’s reign is also worrying. Its founder Sky Xu holds a 37 percent stake and the company is likely to adopt a dual-class voting stock structure to consolidate his and his co-founders’ control. Anyone who joins Shein’s minority investors, including Abu Dhabi’s sovereign wealth fund Mubadala, must accept that they have limited power.
This makes it imperative that Shein has an independent board, with a majority of non-executive directors offering a counterweight to Xu. The fact that it took Shein so long to get an international listing shows the limitations under which it operates. It craves the credibility that the UK and its legal system offers, but in return it must provide security.
Clearly, there are risks involved in allowing Shein to make the list LSE. The UK market has painful memories of the past influx of global companies deemed to have inadequate governance, notably the Kazakh mining group, Eurasian Natural Resources Corporation. Investors do not want to go through similar problems again.
But this year’s reforms are designed to reignite activity after a long-term decline in the number of UK listed companies and the move of IPOs to the US. Liberalisation, including the acceptance of two-class voting, should attract more entrepreneurial firms in growth sectors to London. In many ways, Shein fits the bill.
Campaigners will protest, and some institutions will stay away from Šein. But on the evidence so far, there is no reason to ban it in London. Going public will increase the pressure to continue the cleanup. If I were a fund manager, I would scrutinize its operations and management, but I would like the opportunity.
