Date
24 August 2017
Developer Kaisa Group Holdings says several former employees have "carefully" covered up 41 borrowing agreements involving a total of 35.2 billion yuan. Photo: 21jingji.com
Developer Kaisa Group Holdings says several former employees have "carefully" covered up 41 borrowing agreements involving a total of 35.2 billion yuan. Photo: 21jingji.com

Tight liquidity could expose more China corporate frauds

Sealand Securities, a mid-sized Chinese brokerage, and property developer Kaisa Group Holdings, both reported fraudulent behavior by their employees recently, involving multibillion yuan of funds.

In Sealand’s case, the brokerage discovered a serious problem with its entrusted agreements.

When the mainland bond market was in its heyday, such entrusted agreements were a common practice through which brokers would ask a third party (either another broker or a bank) to temporarily hold their bond assets in the form of sell and buyback transactions.

The third party gets a fee while brokers can release the cash to pursue new investments, basically a way to gear up.

The trick worked well during the bull market but in a downtrend, like what is happening now, Sealand could suffer badly from its high leverage.

Sealand refused to honor the agreement with Bank of Langfang after a recent tumble in bond prices.

The broker claimed that its company seal had been forged by a former employee an it’s not aware of the deal with Langfang.

(Editor’s note: According to the latest reports, Sealand Securities said it would take responsibility for what it previously described as unauthorized bond transactions.)

Separately, developer Kaisa Group Holdings said in an exchange filing on Monday that several former employees have “carefully” covered up 41 borrowing agreements involving a total of 35.2 billion yuan (US$5.07 billion).

These debts have either not been disclosed in its financial statements or faked as pre-payment for property sales.

That means the property developer is facing a much worse debt situation than expected.

Although Kaisa chairman Guo Yingcheng has been involved in the approval of part these loans, there is no sufficient evidence that Guo knows the truth and thus doubtful if he needs to take responsibility.

Both incidents were uncovered after the authorities started to tighten liquidity. There is a good chance that more such misdeeds will be exposed as hot money rushes out of the market.

This article appeared in the Hong Kong Economic Journal on Dec. 21

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at english@hkej.com

RT/RA

Hong Kong Economic Journal columnist

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