Courtesy of Pam Martens
The author of the Citron report, Andrew Left, received a 5-year trading ban in Hong Kong by the Hong Kong Market Misconduct Tribunal over what it alleged was a false report.In 2012, short seller Citron Research released a 57-page report alleging fraudulent accounting at China Evergrande Group, the now teetering Chinese property development conglomerate that is causing severe anxiety in global markets. After spelling out six specific forms of accounting fraud that it believed to be taking place, the Citron report noted the following: “Meanwhile, Evergrande’s auditor, PricewaterhouseCoopers (Hong Kong office) has continued to provide an unqualified opinion.”
On November 30, 2016, GMT Research, an accounting research firm that focuses on Asia, released a report titled: “China Evergrande: Auditors Asleep.” The report found that Evergrande had overcapitalized interest and classified its own commercial premises as an investment property.
Yesterday, those previous charges of accounting irregularities were given new meaning when a specialist from the Congressional Research Service, the research arm of Congress, testified before a House hearing and leveled her own charges.
The hearing was conducted by the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. It was titled: “Taking Stock of China, Inc.: Examining Risks to Investors and the U.S. Posed by Foreign Issuers in U.S. Markets.”
Karen Sutter, a Specialist in Asian Trade and Finance at the Congressional Research Service, told Subcommittee members the following about Evergrande’s accounting:
“Counting unbuilt and unsold properties and interest payments as assets. About 60% of the firm’s assets are unbuilt and unsold properties, and the firm counts loan interest payments as assets. This inflates the firm’s position and increases risks if property values fall…
“Using previously-financed deals as collateral for new loans. This practice allowed the firm to accumulate debt and become leveraged…
“Investing in unrelated sectors beyond the core business. Some Chinese firms use insurance, trust, and wealth management businesses to earn higher returns and invest offshore. The Shenzhen government is investigating Evergrande’s insurance business.
“Use of complex offshore structures tied to the CEO. Evergrande uses overlapping contracts and shareholding to facilitate financial flows that make it difficult to assess liabilities. The CEO and his family reportedly hold a large share of the firm’s offshore debt.”
A report released five days before the hearing by the Congressional Research Service, assessed Evergrande’s debt levels and ability to repay creditors as follows: