Evergrande subsidiary penalized for revenue inflation

Hengda Real Estate, a core unit of Evergrande, has been fined $580 million USD for inflating revenue by nearly $80 billion USD in the two years preceding its debt default.

The China Securities Regulatory Commission (CSRC) announced a fine of 4.2 billion yuan ($580 million USD) on Hengda for inflating revenue by around 214 billion yuan ($29.7 billion USD) in 2019 and 350 billion yuan ($48.6 billion USD) in its 2020 annual report.

According to CSRC, Hengda inflated revenue to attract investors to buy the company's bonds worth 208 billion yuan ($2.9 billion USD) in 2020 and 2021, an action deemed as financial fraud.

The inflated figures accounted for half of Hengda's total revenue in 2019 and 79% in 2020. Additionally, the company's profits were exaggerated by 63% and 87% respectively in those two years.

CSRC accuses Evergrande's Founder and Chairman, Hui Ka Yan, of directing employees to "inflate business results" of Hengda during those two years. According to the regulatory agency, Hui employed "serious" measures. The Evergrande boss is also held responsible for delayed income disclosures of Hengda and failure to disclose unpaid debts and lawsuits the company faced.

Alongside Hengda's penalty, Hui Ka Yan himself was fined 47 million yuan ($6.5 million USD) for falsifying information and other violations. He is also banned for life from participating in capital market activities. Former Evergrande CEO Xia Haijun and CFO Pan Darong, along with other directors, were also fined and banned from capital markets by the regulatory authority.

Evergrande's Chairman has been under police supervision in mainland China since September 2023 under a form of detention called "compulsory measures" after being suspected of crimes. The penalties against Hui are civil fines. CSRC stated that he and other defendants have the right to defend themselves before the penalties take effect. Meanwhile, Hengda has waived those rights and accepted enforcement.

Once Asia's second-richest person with assets worth $42 billion USD at its peak in 2017, Hui Ka Yan witnessed his wealth plummet to around one billion USD after Evergrande defaulted on its debts in 2021. The company's stocks plummeted and were eventually suspended from trading. The conglomerate received a court order for asset liquidation in Hong Kong in January, marking the largest collapse in China's three-year real estate crisis.

In January 2023, PwC Hong Kong withdrew from auditing Evergrande, citing differing views on financial disclosures regarding the new energy vehicle business and real estate services.

By April 2023, PwC China (PwC Zhongtian) also withdrew from auditing Hengda. Last December, another audit firm in Hong Kong, GMT Research, assessed that Evergrande had "never made any profits." In response, the conglomerate stated that GMT's report was "baseless."

Evergrande's downfall reverberated across the global financial landscape, sending shockwaves through markets and raising concerns about the stability of China's property sector. Once hailed as a symbol of China's economic prowess and Hui Ka Yan's entrepreneurial genius, Evergrande's rapid expansion and aggressive debt-fueled growth strategy ultimately proved unsustainable.

The company's troubles began to surface as early as 2018 when Chinese authorities initiated measures to curb excessive borrowing by property developers. Evergrande, burdened with a mountain of debt, struggled to service its obligations as credit tightened and property sales slowed.

Amid mounting financial pressure, Evergrande resorted to desperate measures to raise cash, including asset sales, share placements, and bond issuances. However, these efforts were not enough to alleviate concerns about its solvency, and investor confidence continued to erode.

By 2021, Evergrande's liquidity crisis reached a tipping point, triggering a series of defaults on its bonds and sparking fears of a potential systemic risk to China's financial system. The company's failure to meet its debt obligations reverberated throughout global markets, rattling investors and raising questions about the efficacy of China's regulatory oversight.

The Chinese government, faced with the prospect of a destabilizing financial meltdown, intervened to contain the fallout from Evergrande's collapse. Authorities implemented measures to support the real estate market and prevent contagion to other sectors of the economy, signaling a willingness to intervene decisively to maintain stability.

Despite these efforts, Evergrande's troubles underscored broader systemic vulnerabilities within China's property sector, including excessive leverage, speculative investments, and opaque financial practices. The episode served as a cautionary tale about the perils of unchecked debt-fueled growth and the importance of effective regulatory oversight in maintaining financial stability.

In the aftermath of Evergrande's demise, Chinese policymakers embarked on a comprehensive overhaul of the country's property market, implementing stricter regulations to rein in excessive borrowing and speculative activity. The government's efforts to deleverage the sector and promote sustainable growth have led to a more cautious approach among developers and investors, signaling a shift toward a more prudent and stable real estate market.

However, the fallout from Evergrande's collapse continues to reverberate, with ongoing concerns about the broader implications for China's economy and the global financial system. The episode serves as a stark reminder of the risks inherent in high levels of corporate debt and the need for robust regulatory mechanisms to mitigate systemic vulnerabilities and safeguard financial stability.

Evergrande's downfall serves as a pivotal moment not only for China's economy but also for global financial markets. It highlights the interconnectedness of the world's economies and the potential ripple effects of a major corporate failure.

The saga of Evergrande reflects broader challenges facing China's economy, including the need to transition from debt-fueled growth to a more sustainable and balanced model. It underscores the complexities of managing a rapidly evolving economy while mitigating risks associated with excessive leverage and speculative bubbles.

Moreover, Evergrande's collapse raises questions about corporate governance, transparency, and accountability within China's business landscape. It underscores the importance of robust oversight mechanisms and effective risk management practices to prevent similar crises in the future.

Internationally, Evergrande's troubles have prompted concerns about the exposure of foreign investors and financial institutions to China's property market. The company's default on its bonds has sent shockwaves through global markets, highlighting the interconnectedness of the world's financial system and the potential contagion risks posed by a major corporate failure.

In response to Evergrande's crisis, policymakers around the world are closely monitoring developments and implementing measures to mitigate potential spillover effects. Central banks are reassessing their monetary policies, financial regulators are conducting stress tests to assess the resilience of financial institutions, and investors are reevaluating their exposure to China and other emerging markets.

The aftermath of Evergrande's collapse is likely to shape the trajectory of China's economy and global financial markets for years to come. It serves as a wake-up call for policymakers, investors, and corporations alike, highlighting the importance of prudent risk management, transparency, and accountability in safeguarding financial stability and promoting sustainable economic growth.