Chinese Regulator Fails to Investigate Company Delisted for False Financial Reports

March 22, 2021 Updated: March 22, 2021

Insiders revealed to The Epoch Times that the China Securities Regulatory Commission favored interest groups, leaving small and medium retail investors to bear losses in the case of a delisted company accused of falsifying $2.3 billion in financial data.

Jiangsu Province-based Kangde Xin Composite Material (Kangde Xin) is a technology company focused on pre-filming materials, photoelectric materials, and carbon materials.

The company has been listed on the Shenzhen Stock Exchange (SZSE) since July 2010.

On March 15, 2021, however, SZSE issued a prior notice to delist to Kangde Xin Composite Material.

Delisting removes the listed security of a company from a stock exchange, which may cause investors’ ownership rights to become worthless.

“On Feb. 28, 2021, KDX [Kangde Xin Composite Material] disclosed its retroactively adjusted financial statements, which showed that the company’s corrected net profits from 2015 to 2018 were -1,481 million yuan ($227.51 million), -1,755 million yuan ($269.60 million), -2,460 million yuan ($377.90 million), and -2,357 million yuan ($362.08 million), respectively,” the SZSE said in a press release.

“The net profits were negative for four consecutive years, meeting the condition of mandatory delisting for [a] major violation of [the] law.”

Fictional Cash Reserves

In September 2018, Kangde Xin had reported 15 billion yuan ($2.3 billion) available cash on its balance sheet, among which 12.2 billion ($1.87  billion) was in the state-owned Bank of Beijing.

Months later, Kangde Xin defaulted on a commercial paper payment of 1 billion yuan (153.62 million) on Jan. 15, 2019, when the company admitted the cash reserves were fictional. The Bank of Beijing also confirmed that its available account balance was zero.

“Its violations lasted for a long time,” the SZSE said.

The Bank of Beijing had once signed an agreement with Kangde Xin to transfer all income to another account belonging to its parent company, Kangde Investment Group (Kangde Group), in the Bank of Beijing.

While the transferred fund was still shown in subsidiary Kangde Xin’s account as an accrued balance, the Bank of Beijing has also issued statements, interest payment bills, and issued a letter of inquiry to the audit company for four consecutive years.

“No one knew about this secret channel until the Kangde Xin crisis broke out,” an insider told The Epoch Times.

Zhong Yu, the former chairman and controlling shareholder of Kangde Xin Composite Material, was arrested in May 2019, according to Zhangjiagang Public Security Bureau.

Retail Investors Bear the Loss

The delisting of Kangde Xin directly led to about 133,000 current retail investors’ shares being stripped. Victims include civil servants, police officers, and poverty alleviation officials who found themselves in poverty overnight.

“Delisting means zero,” insider George (pseudonym) told The Epoch Times.

“… [Zhong] hollowed out the company, cashed out all his shares, and then transferred a large amount of debt to the listed company. It equals taking away the good and leaving the bad to the small and medium retail investors.”

Investors seeking legal rights protections are continuously being suppressed while relevant news is covered up on the internet in mainland China.

George revealed that retail investors who had posted relevant information in a WeChat group would be targeted by authorities and warned. Public posts on WeChat or Weibo social media account had been deleted. “The so-called ‘law enforcers’ are screwing them to death,” he said.

Retail investors were required to sign confidentiality agreements before attending China Securities Regulatory Commission (CSRC) hearings.

Interest Groups Benefit

Investors revealed that interest groups, including banks, local government, and parent company Kangde Group, have misappropriated profits but were not investigated by the CSRC, leaving vulnerable investors to suffer from the secondary damage.

Recently, Zhu Yongguo, a mainland retail investor of Kangde Xin, filed a lawsuit against the chairman of the CSRC, Yi Huiman, over the 2019 debt crisis of Kangde Xin, claiming Yi as a complicit party.

Yi, the current chairman of the CSRC, loaned money to Kangde Xin when he was the chairman of the Industrial and Commercial Bank of China (ICBC), Jiangsu branch.

After the crisis broke out, without any announcement to shareholders, Zhong Yu mortgaged 425 sets of core equipment and three pieces of land owned by Kangde Xin, worth about $2.8 billion, to ICBC and China Minsheng Bank.

Millions in tax revenue that had come to the local government were also doubted by investors, given the context of the alleged financial fraud claimed by the CSRC.

George revealed that subsidiary Kangde Xin had raised 2.174 billion yuan ($333.96 million) in funds, three-fourth of which was pledged for its parent company Kangde Group loans in Xiamen International Bank.

George said all parties now treat the small and medium retail investors as a burden. “Interest groups are shiny and bright in appearance, but in fact, they are sucking blood from the common people,” he said.

False News

Yu (pseudonym), a retail investor of Kangde Xin, had lost around 6 million yuan ($921,700) and fled overseas due to harassment and surveillance from authorities. He told the Epoch Times: “We are not gamblers.”

“National leaders standing up for them [Kangde Xin], the Bank of Beijing certifying the over 10-billion deposit, certification from the audit institute, and the patents [of Kangde Xin], we just had believed in all of these before investing.”

CCTV had promoted the listed company, whose market value was once close to 100 billion yuan ($15.36 billion), five times in a row.

Kangde Xin was officially named “Outstanding Private Entrepreneurs of Suzhou City” and “Famous Trademark of Jiangsu Province.”

On Oct. 30, 2015, during German Chancellor Angela Merkel’s official visit to China, Zhong, former chairman and controlling shareholder of Kangde Xin, attended the symposium of China-Germany Council of Economic Advisers in Hefei.

On Oct. 29, Zhong signed a cooperation agreement on behalf of the Chinese side before shaking hands with Chinese Premier Li Keqiang and Merkel.

“CCTV is the brainwashing machine of the CCP. The Chinese media has no moral bottom line,” said the exiled investor of Kangde Xin.

“I was living a comfortable life at home, but now I have to leave with families, seeking a job in a foreign country. There is no way out. I have young children and a family. It’s hard to find a job during the pandemic, and I don’t know this place well.

“I used to know that the CCP was very corrupt, but I was not involved and (felt) that it had nothing to do with me. … it is us, without power and influence, who are left to die.”

Investor Yu said two investors he knows have jumped off buildings.

Audit Company Takes the Blame

The auditing company of Kangde Xin, Ruihua Certified Public Accountants (CPAs), was China’s second-largest CPA firm and responsible for auditing about 1,000 Chinese public companies. It was fined 5.2 million yuan (nearly $800,000) over allegedly fabricating earnings of Kangde Xin.

Ruihua CPAs issued a press release on July 30, 2019, denying any wrongdoing and stating that it had entirely performed its auditing duties. It also sued CSRC over the 5.2 million yuan fine. The audit company argued that the Bank of Beijing’s letter could prove the deposits in Kangde Xin’s account, but the bank refused to release the imputed funds’ flow.

Ruihua CPAs has been facing collapse. Listed companies have terminated their contracts with Ruihua after the Kangde Xin incident, which peaked at the end of 2019.

The Epoch Times reported in 2019 that CSRC formally accused Ruihua CPAs on July 29 and suspended 43 initial public offerings (IPO) that relied on Ruihua CPAs for plans to list on Shenzhen’s ChiNext stock exchange or Beijing’s new NASDAQ-style STAR Market.

According to Wind Information, a Chinese financial data and information provider, the number of A-share companies audited by Ruihua annually plummeted from 213 in 2018 to 29 in 2019. As of 2021, Ruihua CPAs remains only 1 A-share annual audit client.

Since 2017, Ruihua clients have been constantly exposed to financial fraud, including Aerospace Communications Holdings Group, Yatai Industrial Development, Kingsun Optoelectronic, and Furen Pharmaceutical Group, according to mainland Chinese media.