"Bond Issuance with False Performance" Chinese Securities Regulator Fines Hengda 774.7 Billion Won

Non-Compete and Separate Fines for Founders in Same Industry
Audit by PricewaterhouseCoopers
Caixin "Bond Investors Can File Civil Lawsuits"

Chinese securities authorities have imposed a fine of 4.175 billion yuan (approximately 774.7 billion KRW) on Chinese real estate developer Evergrande (Hengda). This follows an investigation that confirmed accounting fraud involving the issuance of bonds based on inflated performance figures.

On the 19th, Chinese economic media Caixin reported that Evergrande was found to have committed serious financial fraud and received this administrative penalty notice from the China Securities Regulatory Commission (CSRC) the previous day. The related investigation began in August last year, and the results were officially announced on this day.

[Image source=AFP Yonhap News]

The CSRC pointed out that Evergrande's publicly disclosed annual performance reports for 2019 and 2020 contained false records. According to the investigation, Evergrande falsely reported revenues of 213.989 billion yuan and 350.157 billion yuan for 2019 and 2020, respectively, by recognizing sales prematurely. These amounts represent 50.14% and 78.54% of the total annual revenue. The CSRC explained, "Evergrande included false records citing fabricated performance in bond issuance documents," adding that the company is suspected of fraudulent bond issuance.

According to Caixin, the corporate bonds issued by Evergrande based on inflated revenues include five issues: 20Hengda02, 20Hengda03, 20Hengda04, 20Hengda05, and 21Hengda01. The total scale of these bond issuances amounts to 20.8 billion yuan.

Additionally, Evergrande was criticized for failing to disclose annual reports and overdue debt information in a timely manner. Since the debt crisis began in September 2021, Evergrande stopped releasing regular financial reports and only disclosed financial results after 2021 in August last year. Furthermore, as of August 31 last year, a total of 2,983 matured debts since 2021 were not disclosed in a timely manner, with the related amount reaching approximately 278.531 billion yuan.

The CSRC designated seven key executives, including Evergrande's actual owner and founder Xu Jiayin, former CEO Xia Haijun, Pan Dalong, Pan Hanling, Ke Feng, Jian Litao, and Chen Cheng, as the main persons responsible for financial manipulation. Among them, founder Xu and former CEO Xia were classified as "directly responsible persons with particularly malicious means and serious circumstances," and were banned for life from serving as directors or executives of listed or unlisted companies. In addition to the fine imposed on Evergrande, Xu and Xia were fined 47 million yuan and 15 million yuan respectively. Other executives were fined between 200,000 and 9 million yuan.

Caixin explained, "Evergrande has long been out of funds and on the brink of bankruptcy, making it unlikely to pay the fines," adding that "administrative fines and confiscations may be prioritized for civil compensation liabilities." Citing a securities lawyer, the report noted, "Based on past cases, Evergrande bond investors can file civil lawsuits against Evergrande and investment intermediaries." It also revealed that all related bonds were invested by CITIC Construction Investment, the bond evaluation agency was Zhongcheng Xinguoji (China Chengxin International), the issuing law firm was Jindu Law Firm, and the auditing firm was the multinational accounting firm PricewaterhouseCoopers.