A Hong Kong tribunal started a preliminary hearing on Wednesday involving the head of US short-seller Citron Research over allegations that Citron published a “false and misleading” report about China’s fourth-biggest developer, Evergrande Real Estate Group, in 2012. The hearing, in the Securities and Futures Commission’s first such action against activist short-selling firms, coincides with fresh signs that heavily indebted Evergrande has become a target as global investors become increasingly worried about pressure on Chinese developers’ cash flow in the wake of peer Kaisa Group Holdings’ offshore debt defaults and the industry’s struggle to overcome a serious glut, particularly in third and four-tier cities where Evergrande has a strong presence. At the city’s Market Misconduct Tribunal, representatives of Citron chief Andrew Left disputed allegations made by the SFC in December that he made a profit of about HK$1.7 million by publishing a report on June 21, 2012, stating, among other things, that Evergrande was insolvent and had consistently presented fraudulent information to the investing public. "The report pertained to Evergrande and was negative in the sense that it stated, inter alia, that the company was insolvent and had consistently presented fraudulent information to the investing public," the SFC submission said. "The information in the report was false or misleading … The company was not insolvent and nor had it consistently presented fraudulent information to the investing public." Evergrande shares slumped 19.6 per cent to an intraday low of HK$3.60 following the release of the report, before closing down 11.4 per cent, compared with a 1.3 per cent drop in the benchmark Hang Seng Index. The SFC submission said Left "was reckless or negligent" to release a report that was "false or misleading" to lure other investors to trade the shares for his own profit and hence might have committed market misconduct. Short-sellers sell borrowed shares, buy them back at lower prices and pocket the difference. They often accuse listed firms of misleading accounting, and rely on securities traders and the media to spread the word for maximum impact. Their approach makes up for the lack of an activist investor culture in Asia. But their reports do not always have an impact on shares and they are sometimes accused of making sensationalist claims. Investors have remained concerned about Evergrande’s thinly stretched finances. Some analysts said its net debt ratio would be much higher than the 89.6 per cent stated in its interim report if the 44.5 billion yuan in perpetual bonds were counted as debt instead of equity. The company will announce its 2014 earnings later this month. It issued a positive profit alert last week, predicting annual net profit growth of between 25 per cent and 35 per cent. Evergrande shares fell 1.4 per cent on Tuesday to HK$3.44 after US equity research firm JL Warren Capital alleged it had defaulted on loans to a major construction company in China. The Guangzhou-based developer denied the allegation. “This is pure rumour,” it said. “Our co-operation with all contractors has been normal.” Evergrande said it had offered 55 per cent discounts last week to sell down inventories of car-parking and commercial retail space. A Hong Kong-based property analyst said the likelihood that Evergrande had defaulted on the construction loans was not high. Otherwise, state-owned Bank of China would not have signed a 30 billion yuan credit line to the developer earlier this week. The agreement followed similar pacts last month with three other lenders – Agricultural Bank of China, Postal Savings Bank of China and China Minsheng Bank – for a total of 70 billion yuan in credit lines, Evergrande said. JL Warren Capital’s head of research, Li Junheng, said on Wednesday morning that she was most concerned about Evergrande’s cash flow, as the latest official data pointed to very slow sales in small cities despite policy support and that mainland banks could lend under government instruction to keep companies like Evergrande afloat, considering the need to maintain employment and social stability. Meanwhile, global investors are becoming more conservative in their views of China's property sector, after Shenzhen-based Kaisa was forced to restructure its debt by extending maturity and cutting coupon rates, so that it could be acquired by rival Sunac China Holdings instead of going into liquidation. The firm’s cash flow diminished quickly and debts soared since December after the Shenzhen city government imposed sales restrictions on some Kaisa projects. The firm is reportedly under investigation in China’s ongoing anti-graft crackdown.