Evergrande Crisis Exposes Financial Fraud in China

In a move that caught everyone off guard, Chinese authorities have uncovered what's now being called the biggest financial scam ever in their stock markets.

by Faruk Imamovic
Evergrande Crisis Exposes Financial Fraud in China
© Getty Images

In a move that caught everyone off guard, Chinese authorities have uncovered what's now being called the biggest financial scam ever in their stock markets. The spotlight is on Evergrande, a huge player in China's property world, and its boss, Xu Jiayin.

The folks at the China Securities Regulatory Commission (CSRC) claim that Evergrande and Jiayin bumped up the company's income by a whopping $78 billion. This revelation has shaken up the financial world big time.

The Investigation and Its Findings

After digging into Evergrande's financial dealings for eight months, the CSRC has hit the company and its big bosses with some hefty fines.

Evergrande's key branch in China, Hengda Real Estate, is looking at a fine of 4.175 billion yuan ($580 million) — news they had to share with the Shenzhen Stock Exchange. Xu Jiayin, the man in charge, isn't getting off easy either.

He's been fined 47 million yuan ($6.5 million) for pumping up the company's income, among other things, and he's also been banned for life from the stock market. This whole mess has thrown a wrench in Evergrande's plans to fix its debt problems, and it even led to Xu Jiayin being detained over suspicions of illegal activities.

Things really hit the fan when a Hong Kong court decided Evergrande needed to be shut down in January 2024. This move has left a lot of people scratching their heads, wondering what's going to happen to the company, the folks who've invested in it, and all the other people tied to Evergrande's fate.

Unpacking the Allegations

The CSRC uncovered some shocking details about Evergrande's shady dealings. It turns out, for 2019 and 2020, the company made up sales numbers that made it look a lot healthier financially than it really was.

They pulled numbers out of thin air, claiming sales of 214 billion yuan ($30 billion) in 2019 and an even bigger 350 billion yuan ($48.6 billion) in 2020. These fake sales pumped up their reported profits big time — by 63% in 2019 and an unbelievable 87% in 2020.

It's clear they were trying to pull the wool over everyone's eyes, from investors to the folks in charge of keeping an eye on them.

Evergrande hotel in Wuhan© Getty Images

Reacting to all this, the CSRC didn't just slap Evergrande with some hefty fines; it also showed the door to a bunch of its top execs, kicking them out of the stock market for good.

This includes Xia Haijun, the company's former vice chairman and CEO. These moves show that the CSRC means business and won't stand for any funny business in China's stock markets.

Implications of Evergrande’s Liquidation

When a Hong Kong court decided it was time to close down Evergrande for good, it marked a huge moment in the drama of this big real estate company that's been struggling.

This kind of decision hasn't been seen before, and it's got a lot of people wondering what's going to happen next — like, how will they actually go about selling off Evergrande's big pile of assets, and what does this mean for the property market in China and for folks who've put their money into it around the world? Evergrande used to be seen as a shining example of how fast China's property world could grow, but now it's more of a warning story about what happens when a company stretches itself too thin.

The company's being taken apart by Alvarez and Marsal, a company the court picked to handle the job, but it's a tricky situation because the laws in Hong Kong and mainland China aren't the same. Plus, there's never been a case quite like this in Hong Kong before, so there's a lot of uncertainty about how things will go down.

Homebuyers and Employees

For the many folks who've been waiting to move into their new apartments, the news that Evergrande is shutting down has them feeling all sorts of ways. They're worried, sure, but there's also a bit of hope.

The Chinese government stepping in to make sure Evergrande finishes building the homes people were promised is a bit of a silver lining. It's super important for keeping things calm and making sure those promises to homebuyers aren't just empty words.

Still, it's a wait-and-see situation on how well this plan is going to work out. Evergrande's employees are in a tough spot too. Imagine, over 100,000 folks might be out of a job because of all this mess. But it might not be all doom and gloom.

Thanks to some help from the government and some legal moves to sort things out, a lot of these jobs could still be there for a while, especially because there's still a need for workers to finish up all those projects Evergrande started. So, there's a bit of hope that not everyone will be hitting the job market all at once.