China’s securities watchdog imposes record fine on Evergrande for ‘fraud’ in stern warning to violators
Regulators to get tough on violators: expert
Published: May 31, 2024 10:50 PM
Evergrande Group Photo: CFP

Evergrande Group Photo: CFP

China's top securities regulator fined Evergrande Group 4.175 billion yuan ($587.67 million) for fraudulent bond issuance and information disclosure violations, while imposing a lifetime ban on Hui Ka Yan, also known as Xu Jiayin, the founder of the real estate developer, from the securities market together with a fine of 47 million yuan, China Securities Regulatory Commission (CSRC) said on Friday in a statement. 

According to the CSRC, the company falsely increased its revenue and profit by prematurely recognizing revenue, resulting in the fraudulent issuance of bonds publicly offered on the exchange market, and the annual reports disclosed contained false records from 2019 to 2020. Meanwhile, the developer was involved in a serious violation for failing to disclose relevant information.

The CSRC fined Evergrande 20 percent of its total funds raised and imposed the maximum fine for its information disclosure violations, making it the strictest penalty since Chinese bond market regulators conducted unified law enforcement. The penalty strictly punishes financial falsification, while also taking into consideration the scale of the bonds and the need to guarantee housing delivery, which adhered to the principle of unifying political, social and legal effects, read the statement. 

CSRC also said that it has been pushing forward the investigation of the relevant intermediary agencies.

Observers said the strong wording by the CSRC indicated that the watchdog will keep the pressure on fraudulent listed firms as well as related parties, including all intermediaries.

"The CSRC wording sends a clear message that regulatory oversight will only grow tighter in the future, and that the regulator will pay more attention to any violations with regard to information disclosure and on investor protection," Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Friday.

In line with a pledge in March by CSRC Chairman Wu Qing to thoroughly pursue whole-process supervision in all links in efforts to nurture a sound capital market, the CSRC said in April that it would strengthen inspections on firms planning IPOs this year by increasing the intensity of inspections and intensifying scrutiny over listed companies, bond issuers, and companies listed on China's "new third board."

The maximum penalty for Evergrande is necessary as part of efforts to fully curb violations from enterprises in the bond market, and it is important to clarify the red line as bonds are also a means of direct financing, Hu Qimu, a deputy secretary-general of the Digital-Real Economies Integration Forum 50, told the Global Times on Friday, stressing the importance of creating a demonstration effect from Evergrande's case.

Evergrande responded on Friday by saying that the company is pushing forward key work such as guaranteeing housing delivery, with more than 80 percent of projects having been completed. It will fully cooperate with the CSRC and other regulatory authorities for the follow-up work, it said. 

The readout highlighted a holistic approach by the regulator to ensure stable development of the housing market and at the same time showed the regulator's determination to stamp out the pestilence of securities fraud, the illegal use of financial levers, accounting fraud and other malpractices, Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China, told Global Times on Friday. 

Any tolerance of these malpractices will only serve to undermine efforts in ensuring housing market stability, so oversights with teeth and spikes must be implemented thoroughly, Dong said.

Both domestic and foreign media outlets have reported that accounting giant PricewaterhouseCoopers (PwC) might be implicated in the fraud. Bloomberg reported on Thursday that the Ministry of Finance may announce penalties on PwC over its auditing work for Evergrande. Meanwhile, 21 listed companies have recently terminated contracts with PwC, which could be related to its involvement in Evergrande's financial fraud, financial news website reported. 

Experts said that the investigation into the relevant intermediary agencies constitutes normal law enforcement operations. 

As an important channel for direct financing of enterprises, the exchange bond market plays an important role in lowering the cost of corporate financing, enhancing the efficiency of financing and strengthening market discipline. Bond issuers should effectively strengthen awareness of the rule of law and investor protection while enjoying the convenience of financing, read the CSRC statement. 

Hu said that the penalty imposed by CSRC is normal in such cases and will not prevent foreign investors from entering the Chinese market while China promotes high-quality opening-up. Hu said that the measures are being taken to establish a long-term mechanism and eliminate systemic risks rather than a crackdown on private enterprises.

The top regulator said that it will crack down on financial fraud in the securities market in accordance with the law, and resolutely strengthen strict supervision and enforcement to effectively maintain the integrity of the market foundation and protect the legitimate rights and interests of investors.