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.
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.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.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.
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.
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.
