Recently, six departments of the Chinese Communist Party jointly issued a document claiming to crack down on financial fraud in the capital market. At the same time, the CCP has amended the “Accounting Law,” stating that it will “increase penalties for accounting violations.” Economists and analysts believe that the reason behind these actions is financial strain. Due to reduced economic activities, the CCP’s fiscal revenue has significantly decreased, and the CCP is now using various means to seize money.
On July 5th, the General Office of the State Council of the CCP forwarded a document jointly issued by the CCP’s Securities Regulatory Commission, Ministry of Public Security, Ministry of Finance, People’s Bank of China, China Banking Regulatory Commission, and the State-owned Assets Supervision and Administration Commission of the State Council, titled “Opinions on Further Enhancing Comprehensive Deterrence and Prevention of Financial Fraud in the Capital Market.”
The document stated that the capital market plays a crucial role in financial operations and that financial fraud seriously disrupts the order of the capital market, shaking investor confidence. It outlined 17 specific measures in five areas, claiming to resolutely crack down on and curb financial fraud in key areas, optimize securities supervision and law enforcement systems, increase comprehensive accountability, and enhance inter-departmental coordination.
The document also mentioned that the methods of financial fraud are continuously evolving, leading to authorities facing difficulties in effectively combating systemic, covert, and complex financial fraud behaviors.
Simultaneously with the release of the above document, the CCP’s Securities Regulatory Commission announced administrative penalties for three listed companies, Jiangsu Shuntian, ST Texin, and ST Zhongli, totaling a fine of 68.3 million yuan (approximately 9.38 million USD). Administrative penalty notices were also issued to two other companies, Yishite and Kaisatongsheng, with a proposed total fine of 52.7 million yuan (approximately 7.24 million USD), and proposed securities market entry bans for one key individual.
Data shows that in the first half of 2024, the CCP’s securities and regulatory system issued 1,682 penalty orders to A-share listed companies, including administrative supervision decisions, regulatory work letters, administrative penalty decisions, and investigation reports, marking a 23% increase compared to the same period last year.
At the same time, the CCP has also amended the “Accounting Law,” which came into effect on July 1st of this year. The new law increases penalties for accounting violations, significantly raising the fine amounts. For example, the maximum fine for acts such as forging or altering accounting certificates, account books, or preparing false financial accounting reports was previously 100,000 yuan (approximately 13,700 USD) and is now ten times the illegal gains; the fine for instructing or directing the preparation of false financial reports has increased from 50,000 yuan (approximately 6,872 USD) to 500,000 yuan (approximately 68,700 USD). Furthermore, the fines for not setting up accounting books as required and other related behaviors have also been correspondingly increased, and adjustments have been made to the fine amount for directly responsible executives and other individuals.
Lu Yuanxing, a former senior executive in the marketing department of several Chinese companies, believes that the CCP’s recent actions are driven by financial desperation, as the authorities are trying various ways to seize money.
During an interview with a reporter from Dajiyuan on July 10th, Lu Yuanxing stated that combating financial fraud by the government is normal, but the social environment under the CCP’s rule is different from Western-style governance. The vast majority of Chinese companies, especially large enterprises, often engage in financial fraud, including those listed in the United States, using fraudulent means to meet listing standards.
He said, “This is similar to the ‘anti-corruption’ campaign. Anti-corruption itself is not wrong, but the CCP uses it as a means to target political opponents because almost no officials can resist the temptation of corruption. Therefore, it uses this as an excuse to achieve its goals. The current situation is the same. Almost no Chinese companies, especially large ones, are free from financial fraud and tax evasion. As long as they are scrutinized, problems can be found. The CCP’s issuance of documents or amendments to laws are actually indicating that they can use these means to go after companies for money, allowing them to acquire a large amount of funds.”
American economist David Huang also told a Dajiyuan reporter that due to the reduction in economic activities, the CCP’s fiscal revenue has significantly declined. In addition, local governments previously relied on land sales for fiscal revenue, but with the current downturn in the real estate market, local governments urgently need new sources of revenue, hence the scrutiny on companies. He mentioned that local governments used to overstate GDP, asking companies to report higher GDP figures. They used to overlook tax issues, but now any oversight leads to crackdowns, making it difficult for companies.
Lu Yuanxing also expressed that the CCP’s measures may yield results in seizing funds, but they will inevitably provoke resistance and public grievances. Although these companies are not innocent, they will eventually see the CCP as an enemy, intensifying conflicts and leading to further social unrest. As wealthy individuals’ investments become increasingly unsafe in China, capital flight is likely to accelerate.
Recent reports on financial fraud by Chinese state-owned enterprises have been frequent in the news, and the term “state-owned enterprise fraud” has become a hot topic on social media platforms, sparking widespread discussions.
On the evening of July 5th, Shaanxi Radio and Television Network Media Group Co., Ltd. issued a public announcement, stating that the company received a pre-notification of administrative penalties from the Shaanxi Regulatory Bureau of the CCP’s Securities Regulatory Commission, which found false records in the company’s 2022 annual report, inflating profits by 23.52 million yuan (approximately 3.23 million USD).
According to regulations, the company’s stock was suspended for one day on July 8, 2024, and other risk warnings were implemented from July 9, changing the stock abbreviation to “ST Guangwang.” The Shaanxi Regulatory Bureau of the CCP’s Securities Regulatory Commission intended to require Guangdian Network to make corrections, issue warnings, and impose a fine of 5.4 million yuan (approximately 740,000 USD). Three relevant persons in charge were also fined 2.4 million yuan (approximately 320,000 USD), 2 million yuan (approximately 270,000 USD), and 2 million yuan (approximately 270,000 USD) respectively.
Guangdian Network is China’s first state-owned large-scale cultural media enterprise to achieve provincial integrated broadcasting and television network integration and go public on the A-share main board. The company’s controlling shareholder is Shaanxi Radio, Television, and Media Group (Shaanxi Radio and Television Station).
Data from the Chinese financial data service platform “Tonghuashun iFinD” shows that as of June 4, 2024, 21 state-owned enterprises have been issued administrative penalties for illegal and irregular behaviors this year, an increase of 13 over the same period last year. Additionally, 18 listed state-owned enterprises have been subject to risk warnings (ST).
One of the most discussed cases is the state-owned holding listed company Jinzhou Port, involving financial fraud and false financial disclosure. Located in Jinzhou Bay on the north bank of the Bo Hai Sea in the western part of Liaoning Province, Jinzhou Port is a port key for regional development in northern Liaoning Province. Investigations revealed that Jinzhou Port artificially inflated operating income, operating costs, and profits by engaging in non-substantive business transactions with seven companies. From 2018 to 2021, the company inflated operating income by over 8.6 billion yuan (approximately 1.18 billion USD).
Apart from Jinzhou Port, other state-owned enterprises like Tefa Information, Strait Innovation, and Zhongtai Chemical also have false records in financial statements, involving unsubstantiated business transactions.
Data from “Tonghuashun iFinD” indicates that this year, 119 state-owned enterprises have been subject to regulatory penalties for breaches, 45 more than the same period last year. Among these, 35 companies have been penalized multiple times, an increase of 16 compared to the same period last year.
Furthermore, in 2023, at least 138 A-share listed companies or related parties were investigated by the CCP’s Securities Regulatory Commission, involving listed companies, executives, controlling shareholders, etc., marking a 79.22% increase from 77 companies in the same period of 2022. It is reported that illegal and irregular information disclosure is the primary reason, leading to 103 listed companies or related parties being investigated, accounting for over 70%.
On June 24, the Chinese Ministry of Finance released the financial revenues and expenditures for May 2024. The data showed that in the first five months of the year, land transfer revenue, a component of local government funds, had decreased by 14% compared to the same period last year. The decline widened by 3.6 percentage points compared to the first four months, indicating a continuous slump in local government land sale revenue.
In the first five months of the year, land transfer revenue, which is the main part of local government funds, amounted to 1.281 trillion yuan (approximately 176 billion USD) for the CCP, representing a continued expansion of the decline.
Additionally, in May alone, land transfer revenue continued to decline by 27.4% year-on-year.
Focusing on individual provinces, according to data from the Yunnan Provincial Department of Finance, in the first five months of the year, Yunnan achieved a land transfer revenue of 11.49 billion yuan (approximately 1.57 billion USD), down by 22.5% year-on-year, a 6.6 percentage point increase compared to the previous four months.
Data from the Jilin Provincial Department of Finance showed that the local land transfer revenue was 6.29 billion yuan (approximately 860 million USD) in the first five months of the year, marking a 36.5% decrease year-on-year.
The Hainan Provincial Department of Finance reported that the local government’s main income from land transfer revenue was about 9.11 billion yuan (approximately 1.25 billion USD) in the first five months of the year, a 12.4% year-on-year decline. This decline remained consistent with the situation in the previous four months.
Moreover, as per data from the research institute under the Guangfa Securities Company in China, among land transfer transactions in 30 provinces in the first five months, 26 provinces experienced a decrease. Of these, 15 provinces witnessed declines of over 30%, with significant drops seen in Guangdong (-57.5%), Sichuan (-42.7%), Jiangsu (-42.6%), and other regions.
The chief economist of Guangfa Securities believes that the sluggish land market is expected to further reduce land fiscal revenue in 2024. Based on revenue collection from land transfers in the first four months, national fiscal land transfer revenue for 2024 is forecasted to be around 4.7 trillion yuan (approximately 645.9 billion USD), decreasing by about 1.1 trillion yuan (approximately 151.1 billion USD) and a year-on-year decrease of 19.0%. The continuous decline in local land transfer revenue is mainly due to the prolonged downturn in the real estate market, causing cash flow constraints for developers and a lack of willingness among residents to buy property, leading to reduced land sales prices.
(Reporter Ning Xin contributed to this report)