The embattled Chinese real estate giant Evergrande, along with its founder, has been penalized following accusations of artificially boosting its revenues by $78 billion in the two years before it defaulted on its debt obligations.
The penalty came 172 days after the arrest of Hui Ka Yan, founder and chairman of Evergrande Group.
According to China experts, Mr. Hui’s future will depend on whether he can expose the high-level corrupt officials behind him and expose more scandals during the ongoing investigation.
The country’s Securities Regulatory Commission (SRC) issued warnings to both Mr. Hui and Xia Haijun, the former president of Evergrande, and imposed heavy fines of 47 million yuan (approx. $6.5 million) and 15 million yuan (approx. $2.07 million), respectively. The SRC also banned them from China’s stock market for life.
At the same time, Evergrande Group was fined 4.175 billion yuan (about $577 million) for bond issuance fraud, which is 20 percent of the total financing amount. Other executives were fined amounts ranging from 200,000 yuan (about $27,600) to 9 million yuan (about $1.24 million).
This is the first public qualification of Evergrande’s financial fraud by the authorities since Mr. Hui’s arrest.
The SRC’s announcement stated that Evergrande and its executives, including Hui Ka Yan, were suspected of three main illegal acts: First, Evergrande’s annual financial reports for 2019 and 2020 contained false statements; second, Evergrande’s public issuance of corporate bonds was suspected of fraud; and third, Evergrande failed to disclose relevant information in accordance with regulations in a timely manner.
According to the SRC announcement, in 2019 and 2020, Evergrande inflated its revenue by 564 billion yuan (about $78 billion), including an inflated revenue of 350 billion yuan (about 48.4 billion) in 2020, accounting for 78.5 percent of the business income in that year. At the same time, the cost was also falsely inflated to 299 billion yuan (about $41.3 billion), with the inflated profits reaching 51.3 billion yuan (about $7.1 billion), accounting for 86.9 percent of the total profit in the year. Therefore, nearly 80 percent of the revenue announced by Evergrande in 2020 was fabricated.
“The more than 560 billion yuan of inflated and fabricated revenue is equivalent to Evergrande creating a non-existent section larger than Vanke,” Chinese state media reported.
Vanke’s revenue was 503.8 billion yuan (about $69.6 billion) in 2022, according to its financial report.
Elite CCP Families Behind Evergrande
Chinese real estate attorney Xu Bin (pseudonym) told The Epoch Times on March 23 that the fine imposed on Mr. Hui is another indication that China is facing significant economic trouble.“Governments at different levels have run out of money. The Xi Jinping administration is determined to seize control of the wealth from private entrepreneurs, shifting the burden of debt onto society. Consequently, Hui Ka Yan’s imprisonment seems inevitable,” he said.
Current affairs commentator Li Yanming believes that these penalties and fines imposed by the SRC are just the beginning.
In an interview with The Epoch Times, Mr. Li said, “Hui Ka Yan and Evergrande are likely to follow in the footsteps of HNA’s Chen Feng. Whether Hui Ka Yan can stay alive or how long his prison sentence may be will depend on how much ‘dark money’ he will reveal and whether he can expose the numerous national-level corrupt officials and elite families behind him.”
He further pointed out that Mr. Hui is not an ordinary private entrepreneur. With close ties to the families of Zeng Qinghong and Jia Qinglin, he also served as a “white glove” for some of the most influential figures in the top echelons of the Chinese Communist Party (CCP).
In China, a “white glove” is an intermediary who conducts a business in the foreground with CCP elites backing him. A white glove “does the dirty work,” allowing CCP officials to keep their hands clean.
“The behind-the-scene CCP officials manipulated the banking and bureaucratic systems to make a huge fortune in the real estate market. The Evergrande crisis not only mirrors the crisis in China’s property market but also reflects the internal power struggles and the reshuffling of dark interest networks among the CCP’s upper echelons,” Mr. Li said.
Colossal Debt
Headquartered in Shenzhen, Guangdong Province, Evergrande Group was founded by Mr. Hui in 1996. The group’s core business is real estate development, and it is one of the largest real estate developers in China, with projects in more than 200 cities in China. In 2021, China Evergrande Group ranked 122nd on the Fortune 500 list.Relying on inflated revenues to obtain bank loans and issue bonds, Evergrande used the borrowed money to expand its business at a shocking pace. However, such a high-leverage practice was unsustainable. In 2021, Evergrande Group’s massive debt exploded, causing concern in the global market.
Chinese media estimated that Evergrande had left behind 1.62 million unfinished buildings involving 6 million buyers. In China, buyers of new homes have to pay deposits in advance and are burdened with mortgage payments even before they have access to their new homes.
Evergrande’s financial report shows that as of June 30, 2023, its total liabilities were 2.39 trillion yuan (about $330.6 million), its total assets were 1.74 trillion yuan (about $240.6 billion), and its net assets were negative 644.2 billion yuan (about $89.1 billion).
In fact, more than a decade ago, short seller Andrew Left, the founder of Citron Research, issued a report in June 2012 saying that Evergrande used “fraudulent, aggressive accounting” and was actually insolvent.
However, despite Citron’s warnings, Evergrande’s independent auditor, PwC, still provided a clean audit report on Evergrande’s finances.
The Chinese public is closely watching the progress of Mr. Hui’s trial, and many wonder what the authorities can do to hold the Hui family accountable. At a time when Evergrande was struggling to pay its debts, Mr. Hui transferred huge amounts of assets offshore to his ex-wife, Ding Yumei, who holds a Canadian passport.
