Developer's claim of innocence isn't entirely convincing
Last Thursday Los Angeles-based short-selling specialist Citron Research published a report into mainland property giant Evergrande alleging all sorts of naughtiness.
Among other sins, Citron accused the company of cooking its books, bribing government officials, and exaggerating its chairman's academic credentials.
In response, Evergrande's Hong Kong-listed shares plunged by 14.5 per cent in just two days of trading, wiping HK$9.7 billion off the company's value.
On Friday Evergrande's chairman, Hui Ka-yan, issued a lengthy rebuttal. In a statement to the Hong Kong stock exchange he rejected Citron's claims that Evergrande had inflated its cash holdings, overvalued its assets and hidden debts off-balance sheet to disguise the company's insolvency and stave off its impending financial collapse. Hui also denied that Evergrande had built up its massive cut-price land bank by bribing local government officials.
He explained that Evergrande was able to acquire its 137 million square metres of land reserves for an average price of just 616 yuan (HK$754) a square metre - that's more than twice the land held by any of its competitors at less than half the cost - because it had focused on buying land in second-and third-rate cities.
Hui also asserted that his qualifications were all genuine.
Now, I'm not really qualified to pronounce on Evergrande's book-keeping methods or the accuracy of its accounts.
It seems to me to be a case of 'he said, she said', with a professional short-seller on one hand, and a mainland property developer, backed by its investment bankers and auditor, on the other.
Readers can judge for themselves which side is the more reputable.
Nor do I have any comment to make about the academic merit of honorary doctorates awarded by the University of West Alabama.
But when Hui denies that Evergrande pays bribes to officials because it buys its land in the secondary market, and 'the acquisition of land in the secondary market has nothing to do with the government and there does not exist any possibility of bribery of government officials', I hear alarm klaxons going off all over the shop.
This statement is disingenuous in the extreme. It's true that sweetheart land sales were officially banned back in 2002 when local governments in China were ordered to sell building plots through open and competitive auctions.
But in the vast majority of land sales - around 70 per cent - there is only one anonymous bidder, and the plots up for sale are quickly knocked down for their reserve price, which is usually a fraction of their true market value.
So for an unscrupulous property developer, acquiring land on the cheap is as easy as falling off a log. The developer comes to a cosy arrangement with local government officials, who proceed to the desired sell plots of land at their reserve prices to a company they themselves have set up. This company then sells the plots on to the developer in the secondary market at well below the going rate.
Technically no bribes have been paid, but the officials pocket a handsome profit without running any risk, and the developer ends up with a cut-price land bank.
The cost is borne by local government finances. And it is enormous; some 60 billion yuan a year in lost revenues according to one 2010 estimate.
Now, Evergrande may well be a rare model of probity in a wildly crooked market. Certainly I have no particular reasons to doubt Hui's assertion that Evergrande has always operated within the law and that it never pays bribes.
But for the chairman of one of the largest property developers on the mainland to declare that 'the acquisition of land in the secondary market has nothing to do with the government' stretches credulity to the extreme. If Hui genuinely believes that, then he is displaying a remarkable degree of ignorance about how the mainland real estate market actually works.
No wonder investors are dumping the stock.