It was a spectacular fall from grace for China Evergrande Group, the real estate giant at the center of China’s real estate crisis. The real estate firm grew so big that it even owned a Chinese Super League soccer team, but it racked up $300 billion in debt, defaulted and was ordered into liquidation by a Hong Kong court.
Now, Beijing’s latest accusation is that both Evergrande and its founder, Hui Ka Yan, have grossly inflated revenues.
On Monday, China’s securities regulator accused the real estate giant of inflating its 2019 and 2020 revenues by a total of nearly $80 billion. The China Securities Regulatory Commission said Evergrande’s main onshore unit, Hengda Real Estate Group, increased its 2019 revenue by 214 billion yuan ($29.7 billion) by booking sales early. Regulators say Hengda then inflated revenue again the following year by 350 billion yuan ($48.6 billion), according to a filing by the company on the Shenzhen and Shanghai stock exchanges.
The CSRC will impose a fine of 4.2 billion yuan ($583 million) on Hengda Real Estate Group and a fine of 47 million yuan ($6.53 million) on Hui. Evergrande’s founder will also receive a lifetime ban from the securities market.
Regulators place much of the blame on Hui, who allegedly instructed other staff to “falsely inflate” Hengda’s annual results for 2019 and 2020.
If the CSRC’s allegations are accurate, Evergrande will be guilty of one of the largest frauds in history. At $78 billion, Evergrande’s alleged fraud dwarfs the accounting scandal of Chinese company Luckin Coffee (at $300 million), or the revelations that Enron inflated profits by $600 million and that Worldcom was implicated in financial fraud worth $11 billion, according to Bloomberg.
The announcement comes just days after the CSRC vowed to crack down on securities fraud and protect small investors with “tooth and horn.”
Evergrande and the real estate crisis in China
This latest accusation is just another blow to Hui, once the richest person in China and the second richest person in Asia. Hui had a personal worth of $42 billion in 2017, but his net worth has fallen 98% to just $979 million, according to Bloomberg estimates. Police placed Hui under surveillance last September on suspicion of involvement in “illegal crimes”.
Evergrande is undoubtedly the symbol of the real estate crisis that has lasted for years in China, thanks to its debt of 300 billion dollars.
Hui founded Evergrande in 1996 and the company grew as China’s economy boomed and more Chinese turned to real estate as an investment. But the company was overleveraged and began showing signs of trouble after Beijing began limiting debt financing to huge Chinese developed properties in 2020. Evergrande defaulted on its offshore debt in December 2021.
Evergrande then failed to convince creditors to support a restructuring plan. In January a Hong Kong court ordered the company to be liquidated.
Continued uncertainty in China’s real estate sector weighs on market sentiment. Although authorities are trying to support the sector through stimulus and looser restrictions on home purchases, the crisis shows no sign of abating. Data released Monday shows real estate investment fell 9% year-on-year in the first two months of the year.