Numerous Chinese Listed Companies Punished For Financial Fraud

A board shows the stock movements inside the Shanghai Stock Exchange in the Lujiazui Financial district of Shanghai on Sept. 22, 2015. Johannes Eisele/AFP via Getty Images

Amidst China’s economic and fiscal crisis backdrop, a notable leadership shift has occurred at the China Securities Regulatory Commission (CSRC). Following the change, numerous listed companies have come under intense scrutiny and face penalties from the CSRC due to financial misconduct and other infractions. Among these, Shaanxi Aerospace Power stands out for inflating its revenue by $525 million over five years, while the prominent pharmaceutical company GuangYuYuan has been implicated in financial fraud exceeding $93 million over eight years.

From January through March of this year, the CSRC subjected 60 A-share listed companies in China to administrative penalties, marking a year-on-year increase of over 60 percent. The common reasons for penalties include accounting irregularities, failure to meet disclosure obligations, missed deadlines for periodic reporting, inadequate internal systems, and suspected insider trading, among other illicit activities.

In a significant development in March, two companies, *ST New Sea Union Technology Group Co Ltd (New Sea) and *ST Poten Environment Group Co Ltd (Poten), faced severe penalties, including delisting due to substantial issues such as financial fraud.

Both companies have the mark “*ST,” which signifies a warning for potential delisting, indicating that the company has been operating at a loss for three consecutive years. The mark ST indicates the company’s stocks are undergoing special treatment due to two consecutive years of operating losses.

On March 25, A-share *ST New Sea (SHE: 002089) declared the company would undergo a delisting transition period commencing from March 26, lasting for fifteen trading days, with the final trading date anticipated to be April 17.

As per the CSRC’s “Administrative Penalty Decision,” *ST New Sea had fabricated records in its annual reports from 2014 to 2019, reporting inflated sales revenue of $511 million at the consolidated statement level and inflated profits totaling $74.68 million. Consequently, the Shenzhen Stock Exchange opted to delist the company.

A day after *ST New Sea’s announcement, *ST Poten (SHA: 603603) released a statement confirming the Shanghai Stock Exchange’s decision to delist the company’s stock. The delisting transition period for the stock spanned from March 27 to April 18. The “Administrative Penalty Decision” concluded that the company’s annual reports from 2017 to 2021 contained false information. The company had been involved in financial fraud for five consecutive years, amounting to $276 million. Thus, the Shanghai Stock Exchange resolved to delist *ST Poten.

8 Years of Financial Fraud

On March 25, China’s state-owned pharmaceutical company Shanxi GuangYuYuan Chinese Herbal Medicine Co., Ltd. announced that it had received a “Pre-Notification of Administrative Penalty and Market Ban” from the Shanxi Securities Regulatory Bureau. The notice claimed the company falsified its annual reports from 2016 through 2022 and its 2023 interim report, inflating profits by $93.3 million and deflating profits by $65 million from 2021 to the first half of 2023. The company and relevant executives face a total fine of $2.92 million.

As of the closing on March 26, GuangYuanYuan’s stock price was 24.76 yuan ($3.43) per share, with a total market value of about $1.675 billion. This represented a decrease of 54.18 percent compared to the peak stock price of 54.04 yuan ($7.48) per share in July 2021.

Five Years of Revenue Inflation

On March 25, the state-owned and publicly traded company, Shaanxi Aerospace Power Hi-Tech Co., Ltd., announced their receipt of an “Administrative Penalty Decision and Market Ban” from the CSRC (referred to as the ‘Penalty Decision’). The Penalty Decision stated that the company had inflated its operating income by $525 million over five years, starting in 2016. The company was fined $1.64 million, and the principal decision-maker at the time, General Manager Guo Xinfeng, was banned from the securities market for ten years. Additionally, two former executives involved in the Sui Tianli specialized network communication case were sentenced to prison terms.

Aerospace Power participated in the Sui Tianli specialized network communication business in 2016. In May 2021, the fraudulent activities of this business were exposed, and besides Aerospace Power, nine other listed companies involved in the business received the CSRC’s Penalty Decision notification.

Financial Fraud Involving Six STAR Market Companies

The STAR Market, officially known as the Shanghai Stock Exchange Science and Technology Innovation Board, is a Chinese science and technology-focused equities market established in July 2019 with 179 listed companies. STAR has been touted as Shanghai’s equivalent to the U.S. Nasdaq, aiming to provide Chinese science and technology companies greater access to capital markets.

Since the launch of the STAR Market four years ago, six listed companies have been found to have engaged in financial fraud and have received “Administrative Penalty Decisions” from regulators. Among them, four companies falsified their financials by inflating revenue and profits and deflating operating costs in their prospectuses and periodic reports. The other two fabricated significant false information, engaging in fraudulent issuance.

In addition to the companies mentioned earlier, on March 19, Shanghai Industrial Development Co Ltd (SID) announced that it had received a “Pre-Notification of Administrative Penalty and Market Ban” from the Shanghai Regulatory Bureau of the CSRC. The notice determined that SID (SHA: 600748) had violated regulations by failing to disclose anticipated operational losses in a timely manner, not disclosing significant contracts promptly, and having suspected false information in its annual reports. SID had engaged in financial fraud for six consecutive years, with a total of $653 million in inflated revenue and a total inflated profit of $85 million from 2016 to 2021.

China Evergrande Revenues Inflated Over 2 Years

On March 18, after 172 days of being detained, Xu Jiayin, chair of the Chinese real estate giant Evergrande Group, was punished by the CSRC for suspected financial fraud.

According to the announcement, “Evergrande Group inflated its revenue by $78 billion in 2019 and 2020.”

Mr. Xu and former President Xia Haijun were given warnings and lifetime bans from the securities market and were fined $6.5 million and $2.07 million, respectively.

Additionally, Evergrande Group was fined $5.77 billion for bond fraud, equivalent to 20 percent of the total financing amount. Other senior executives were fined between $27,600 to $1.24 million.

Widespread Phenomenon of Financial Fraud

According to public data, there are 5,000 A-share listed companies in China, and financial fraud is prevalent among them.

Last year, 138 listed companies in China were investigated by the CSRC, and at least 78 chairpersons or controllers of listed companies participated in the misconduct.

Many listed companies have engaged in financial fraud for several years without supervision. Methods of fraud vary, including fictitious businesses, premature or delayed revenue recognition, and inflating or deflating costs, among others. Fictitious businesses are particularly insidious and egregious.

Under the lamentation in the Chinese stock market, Wu Qing was appointed as the new chair of the CSRC on Feb. 7. Subsequently, he convened multiple meetings, proposing strict investigations into hundreds of companies preparing for IPOs and even reviewing already listed companies to rectify financial fraud. On March 26, the CSRC issued the “Opinions on Strengthening the Supervision of Listed Companies (Trial),” proposing to decisively eradicate the “ecosystem” of financial fraud.

Political commentator Li Yanming told The Epoch Times on March 28 that the change in leadership at the CSRC was a necessary move amid the severe economic crisis facing the Chinese Communist Party (CCP) and the imminent collapse of the financial system. “Financial fraud among listed companies is just the tip of the iceberg of systemic corruption within the CCP. The actions of the CSRC indicate an escalation of power struggles and purging actions in the financial sector, but they cannot fundamentally solve the economic and financial crisis.”

“Deception is one of the characteristics of the CCP. Because of deception, its real estate is a bubble, and the entire financial and economic system is a bubble. This bubble has begun to burst, and no one can save it,” said Mr. Li.