Chinese Authorities Target Companies in Bid to Raise Capital Amid Sluggish Economy: Experts

The Lujiazui financial district in Shanghai, China, on June 5, 2024. Hector Retamal/AFP via Getty Images

News Analysis

The Chinese regime’s financial constraints have prompted Beijing to collect money from companies through various means, according to finance experts.

Six Chinese ministries recently issued a joint document stating their intention to crack down on financial fraud in the capital market. Meanwhile, the authorities amended the Accounting Law to increase penalties for accounting violations.

The State Council released a document on July 5 jointly issued by the China Securities Regulatory Commission (CSRC), the Ministry of Public Security, the Ministry of Finance, the Central Bank of China, the National Administration of Financial Regulation, and the State-owned Assets Supervision and Administration Commission.

The document states that financial fraud has seriously disrupted capital market order and undermined investor confidence. It also notes that financial counterfeiting tactics are constantly evolving, making it difficult for the authorities to combat systemic, hidden, and complex financial fraud effectively.

In conjunction with the release of this document, the CSRC announced administrative penalties against three listed companies: Jiangsu Sainty, Shenzhen SDG Information Ltd., and Jiangsu Zhongli Group. The fines totaled 68.3 million yuan (about $9.38 million), and six individuals faced market entry bans. The CSRC also issued preliminary administrative penalty notices to East Group and Caissa Tosun Development Ltd., with a proposed total fine of 52.7 million yuan (about $7.24 million) and a proposed market entry ban for one individual.

According to public data, in the first half of 2024, the Chinese Communist Party (CCP)’s securities regulators issued 1,682 disciplinary documents to A-share listed companies, including decisions on administrative supervision measures, administrative penalties, and investigation notices. This represents an increase of 23 percent compared to the 1,364 disciplinary documents issued in the same period last year.

The CCP also amended the Accounting Law, which took effect on July 1, 2024. The new law significantly increases penalties for accounting violations and raises fines. For instance, the fine for directing or instructing the preparation of false financial reports has been increased from 50,000 yuan (about $6,872) to 5 million yuan (about $687,000).

‘Looting Money’ From Companies

Finance expert and former marketing executive Lu Yuanxing said the CCP is short of funds, and the authorities are “looting money” from civilians by any means necessary.

In an interview with the Chinese edition of The Epoch Times on July 10, Mr. Lu said that it is typical for the authorities to crack down on financial fraud, but the social environment under the rule of the CCP is different from Western societies where the rule of law prevails.

According to Mr. Lu, most companies in China, especially the big ones, often engage in financial fraud, including those listed in the United States, and they use fraudulent means to meet listing standards.

“This [new wave of crackdown on financial fraud] is the same as the CCP’s anti-corruption campaign,” he said. “There is nothing wrong with the anti-corruption campaign, but the CCP uses it as a tool to go after political opponents because no official is immune to corruption, so they use it as an excuse to get what they want.

“There’s almost no business in China that doesn’t have financial fraud and tax evasion, and it’s easy to find out if you look into it. When the CCP releases a document or changes a law to target this area, it actually shows that they can now go out and take money from companies by doing this, which adds up to a huge amount of money,” he added.

U.S. economist Davy Jun Huang told The Epoch Times that with local governments it’s the same. They had relied heavily on land sales for fiscal revenue in the past two decades. However, with the current downturn in the real estate market, local authorities are scrambling to find new sources of revenue and have turned to auditing companies and charging back taxes.

“In the past, local governments often inflated their GDP figures and pressured companies to report higher profits. Tax audits were rare then, but now, any company that undergoes a tax audit would be found to have committed financial fraud. Then, the local government would accuse these companies of reporting high profits but not paying enough taxes, making it very difficult for these companies,” Mr. Huang said.

Mr. Lu said the CCP’s latest measures might uncover some funds, but they are bound to cause resistance and public resentment. Although these companies are not entirely blameless, he said, they will increasingly view the CCP as their enemy, exacerbating conflicts and potentially leading to further social unrest. As the business environment in China becomes increasingly unstable for wealthy individuals, capital flight is likely to accelerate, he added.

Allegations of Financial Fraud

Recently, cases of financial fraud among state-owned enterprises (SOEs) in China have been increasingly reported.

As of June 4, 21 SOEs received administrative penalties for allegedly conducting illegal activities, compared to eight in the same period last year; in addition, 18 listed SOEs have been put on “risk warning,” according to data from China’s financial data service platform iFinD.

Further, iFinD data show that regulators have fined 119 SOEs for non-compliance since the start of this year, an increase of 45 from the same period in 2023.

One widely reported case is Jinzhou Port, a state-controlled listed company implicated in financial fraud, including falsifying financial statements.

This company is responsible for developing Jinzhou Port, a regional port in Liaoning Province, and a key development project. It was found to have allegedly engaged in commercial transactions with seven companies to artificially inflate its operating income, operating expenses, and total profit.

Between 2018 and 2021, the firm’s reported operating revenue increased by more than 8.6 billion yuan (about $1.18 billion) through alleged fraudulent activity.

In addition to Jinzhou Port, other state-owned enterprises—including Tefa Information, Strait Innovation, and Zhongtai Chemical—allegedly manipulated data in their financial statements.

Xin Ning contributed to this report.