China's Second-Largest Property Giant Evergrande Accused Of $78B Fraud, Founder Hui Ka Yan Faces Legal Peril

China’s Evergrande Group EGRNQ has been accused of massive fraud, with its founder Hui Ka Yan at the center of the controversy. The company’s onshore unit, Hengda, is alleged to have inflated its revenue by $78 billion, leading up to its default in 2020.

What Happened: The China Securities Regulatory Commission (CSRC) has imposed a fine of 4.18 billion yuan ($581 million) on Evergrande’s onshore unit, Hengda, for allegedly inflating its revenue over a two-year period leading up to its default in 2020, reported Bloomberg.

"The CSRC fines may serve as a warning to owners of other defaulted developers that failing to collaborate with authorities over debt restructuring could result in severe consequences," said Zerlina Zeng, senior credit analyst at Creditsights Inc., according to the report.

The alleged fraud, which is among the largest in history, has raised concerns about the extent of accounting issues in China. The CSRC’s actions have also raised the possibility of more serious charges against Hui, who was detained by police last year for suspected illegal activities.

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Evergrande, once one of China’s largest developers, has been hit hard by the country’s real estate crisis, receiving a liquidation order from a Hong Kong court in January. The CSRC’s fine against Hengda, while among the largest ever in China, is lower than the 7.1 billion yuan fine imposed on Ant Group for policy violations.

"The alleged fraud is shocking in its scale. Hui became an expected civil and criminal target as soon as Evergrande was ordered into liquidation," said Brock Silvers, managing director at private equity firm Kaiyuan Capital.

Why It Matters: The allegations against Evergrande come amid China’s ongoing real estate crisis, which has had a significant impact on the country’s economy and financial sector. In a recent statement, a minister in China’s government emphasized that developers facing serious insolvency must go bankrupt, reflecting the severity of the situation.

The real estate crisis has also sent shockwaves through China’s banking sector, with the country’s real estate nightmare causing significant disruptions.

This crisis, coupled with other economic challenges, has led to a $7 trillion stock decline in February, prompting Chinese President Xi Jinping to grapple with measures to stabilize the market.

Despite these challenges, China has recently witnessed its strongest industrial growth in two years, raising questions about the need for further stimulus measures. The ongoing developments in China’s real estate and financial sectors will likely have a significant impact on the country’s economic outlook and global markets.

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