In recent news, there have been multiple cases of state-owned enterprises in China engaging in financial fraud, with the most severe being a company falsifying $8.6 billion in the past 4 years. These incidents highlight a widening wave of “state-owned enterprise fraud” in China, causing concerns among experts about the systemic risks it poses to the financial market.
According to data from “Tonghuashun iFinD,” as of June 4th, 21 state-owned enterprises have been issued administrative penalties for illegal activities this year, an increase of 13 compared to the same period last year. Additionally, 18 listed state-owned enterprises have been issued risk warnings.
Professor Sun Guoxiang from the International Affairs and Business Department at Taiwan’s Nanhua University mentioned that large-scale financial fraud by state-owned enterprises could lead to systemic risks in the financial market. He warned of potential market turmoil and even stock market panic if state-owned enterprises continue to falsify their financial data.
American economist David Huang also expressed his concerns, emphasizing the significant impact of state-owned enterprise fraud on society and government trust. He pointed out that when even the most supposedly secure enterprises are found engaging in fraudulent activities, it undermines public trust and creates a sense of anxiety among citizens.
The reasons behind the financial fraud vary among the implicated state-owned enterprises. For example, Xinjiang Zhongtai Chemical Company’s director of secretariat admitted that they inflated revenues to meet the controlling shareholder’s revenue targets. The company accumulated over $7.2 billion in falsified revenue over three years, with $4.2 billion being in 2022 alone.
The trend of increasing financial fraud among state-owned enterprises is attributed to various factors. Leaders of these enterprises often resort to falsification to gain political capital and secure higher positions within the government. Additionally, the lack of talented individuals in management roles has pushed unqualified personnel to fabricate financial data to maintain appearances.
The implications of these fraudulent activities extend beyond financial losses to investors. With 6 state-owned enterprises falsifying financial records, resulting in a combined revenue inflation of over $16 billion, around 400,000 shareholders have suffered losses. The fines imposed by Chinese regulatory authorities on these companies seem inadequate compared to the magnitude of their fraud.
Sun Guoxiang highlighted the weaknesses in internal control and regulatory systems that enabled such fraud to occur. He emphasized the need for stronger oversight and enforcement to prevent future incidents and restore public trust in state-owned enterprises.
With the escalation of state-owned enterprise fraud, Chinese Vice Premier Ding Xuexiang pledged to strengthen and enhance the performance of state-owned capital and enterprises. However, experts like Sun Guoxiang and David Huang remain skeptical about the effectiveness of these measures and stress the urgent need for comprehensive reforms to address the root causes of financial fraud in China’s state-owned sector.