China’s securities regulator slapped a fine on one of the country’s largest property developers and barred its founder from accessing the capital markets for life, after accusing China Evergrande Group of fraud.

Evergrande must pay a fine of almost 4.2 billion yuan (US$583.4 million), according to a statement by the China Securities Regulatory Commission (CSRC).

Hui Ka-yan, the founder and former chairman of the Guangzhou-based company, was fined 47 million yuan and barred from taking part in China’s securities market for life, the statement said. Six other current and former Evergrande executives were slapped with penalties of between 200,000 yuan and 15 million yuan.

Evergrande, which has the dubious honour as the world’s most indebted developer with more than US$300 billion of liabilities, stands accused of inflating its revenue in the years leading up to its collapse. Its Hengda Real Estate unit issued bonds based on forged financial data, according to a stock exchange filing.

Is Evergrande too big to fail?

The harsh penalty reflects the irregularities and rule violations that have emerged in China’s property sector over the past decades as a result of rapid expansion, said Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institute.

Hengda inflated its 2019 income by around 214 billion yuan, making up over half of its operating income and 63.3 per cent of its profit during the period. A year later, the company inflated its income by over 450 billion yuan, or 78.5 per cent of its operating income and 86.9 per cent of its profit during the period.

“Hengda is not an individual case in this situation, and companies should proactively self-regulate as the CSRC is expected to ramp up its crackdown in the future,” Yan said.

“The depth of the alleged fraud is shocking, but should not significantly impact the company or its creditors,” said Kaiyuan Capital’s managing director Brock Silvers in Hong Kong.

China’s once-mighty developers face brutal years after end of ‘golden age’

The biggest-ever liquidation order on a Hong Kong-listed company came at a time when markets were expecting a stimulus package from Chinese authorities to calm sluggish stocks and stabilise home sales performance.

The decision triggered an implosion in the shares and bonds of the company and its associates. The rest of the sector saw buying, which analysts say reflected optimism that the court’s order would remove the most problematic entity in the sector, allowing authorities to introduce easing measures for the remaining players.

Still, the liquidation order comes at a tricky time when China’s capital flows through direct and portfolio investment face more pressure, according to a Citi report. “Such risk-averse sentiment can be amplified with the lower repayment priority for offshore bondholders, confirming our prediction in October 2021, and the potential losses for shareholders.”

Evergrande loses projects as Chinese firms pick away at its assets

Evergrande has more than 1,200 projects at different stages of progress, ranging from near completion to under construction, according to its 2022 annual report.

It would be difficult for offshore creditors to take control of Evergrande’s mainland assets, especially considering the priority to deliver 1.6 million pre-sold homes, according to the report.