A team effort to boost investor confidence and economic growth is underway in China after Evergrande’s failure. Video / Carson Bluck
China’s securities regulator has accused Evergrande and its founder Hui Ka Yan of inflating its mainland Chinese revenues by almost $80billion (NZ$131.5b) over 2019 and 2020, in the first detailed allegations by authorities to shed light on the failure of the world’s most indebted property developer.
The China Securities RegulatoryCommission plans to impose a Rmb4.2bn ($580m) fine on Hengda Real Estate, Evergrande’s mainland business, according to a filing by the company to the Shenzhen and Shanghai stock exchanges that included accusations of false documentation in financial reports.
The filing cited a CSRC preliminary decision as saying Hui, once China’s richest man, would be fined Rmb47m and faced being banned for life from the country’s markets. It accused him of “instructing other personnel” to inflate company metrics.
The filings, released late on Monday, are a milestone moment in a prolonged corporate failure that has so far been characterised by a lack of transparency for the international investors who ploughed more than $20b into a business made up of hundreds of individual residential projects.
Evergrande, with its more than $300b in liabilities, came to embody the excesses of China’s property industry when it defaulted in late 2021, precipitating a domino effect across its developer peers that continues to weigh on the wider economy.
The company’s Hong Kong-listed entity was ordered into liquidation in January by a court in the territory, though the ruling’s implications in the distinct legal environment of the Chinese mainland, where almost all Evergrande’s assets are based, remain uncertain.
The Hengda filing quoted the CSRC’s preliminary decision as saying the company inflated revenue by recognising it in advance in 2019, resulting in an increase of Rmb214b — half of the total — and inflated revenue by Rmb350b in 2020, almost four-fifths of the total.
The CSRC, which according to the filing also suspects that bonds in the mainland were issued on a fraudulent basis, did not directly release its preliminary decision itself and did not immediately respond to a request for comment.
The filings do not refer to dollar-denominated bonds sold by Evergrande, on which it originally missed payments in September 2021. Nearly two years of negotiations between offshore investors and the company failed to produce any viable restructuring plan.
Beijing has over that period prioritised the completion of residential projects started by Evergrande and other developers.
Hui was placed under “mandatory measures” by Chinese authorities in September, according to a company filing at the time. In January, Evergrande’s headquarters in the southern city of Guangzhou were surrounded by police and newly erected fencing.
Hengda’s auditors in 2019 and 2020 were PricewaterhouseCoopers Zhong Tian, a mainland entity affiliated with PwC’s network. PwC Zhong Tian resigned as auditor in 2023, according to company filings.
The Evergrande Mansions construction site in Dongguan in southern China. Photo / Gilles Sabrie, The New York Times
PwC, the auditors of the company’s accounts in Hong Kong, resigned the same year and are the subject of an investigation by Hong Kong’s audit regulator.
PwC did not immediately respond to a request for comment.
Natixis senior economist Gary Ng said the revelations raised the question of whether there were “more hidden financial tricks” in Evergrande’s financial reports.
Official data on Monday showed China’s real estate sector crisis is continuing. Property investment fell 9 per cent year on year in January and February, while new construction starts plummeted 30 per cent, their worst fall in more than a year.
