As the financial reporting season for listed companies approaches, several auditors in Chinese real estate companies have resigned, further heightening concerns about the financial situation of Chinese developers. Some economists have pointed out that auditors’ resignations are often signs of a listed company’s financial trouble.

Bloomberg reported on Jan. 28th that Chinese property developer Hopson Development Holdings announced that its auditor PricewaterhouseCoopers (PwC) resigned as the company’s auditor and had failed to reach a consensus on audit fees for fiscal 2021. It is understood that PwC has not yet obtained sufficient information required to complete auditing procedures.

On Friday, Jan. 28th, Hopson’s Hong Kong shares plunged as much as 30%, the highest drop since 2009, and its U.S. dollar bonds may have fallen by a record amount. According to traders, China’s high-yield dollar bonds fell at least 3 cents.

Earlier this week, China Aoyuan Group announced that Deloitte Touche Tohmatsu had resigned as the company’s auditor. In addition, China Aoyuan said that the two parties could not agree on the audit fees for the previous year’s financial results, considering that liquidity issues required additional review procedures. On Monday, Jan. 24th, Shanghai Shimao also announced that it would change its auditor.

Bloomberg Intelligence analyst Andrew Chan wrote in a report, “PricewaterhouseCoopers (PwC)’s sudden resignation as the auditor of Hopson, a relatively strong China property developer, could kickstart the mass resignation of other auditors.”

Chan said that the firm’s resignation “could have serious ramifications for the Chinese property sector” and that any similar moves could cause further equity and bond price volatility and increase the risk of report delays.  

In a Monday report, Citi analysts wrote that earnings delays could occur across the industry as auditors review developers’ cash flow and liquidity. Accounting will be affected by the lack of transparency, and earnings reports for some Hong Kong-listed companies may be delayed until the last day of publication on March 31st.

Expert: Changing auditors is one of the signs of financial problems of listed companies

Mainland media “Times Finance” reported on Jan. 28th, an industry insider who did not want to be named said as far as he understands regarding the frequent resignation of auditors, it is because the Institute of Certified Public Accountants is conducting strict investigations. As a result, auditors are not willing to cooperate with enterprises.

Some real estate analysts state that this situation can only be interpreted that a company’s financial report is falsified or misrepresented and not recognized by auditors. 

For example, in March 2021, the 2020 annual report of Yuzhou Group, a new 100 billion real estate company, showed a “big change.” The financial report data of Oriental shows that in 2020, Yuzhou Group’s annual revenue was about 1.6 billion USD, down more than half a billion dollars from US$2.2 billion in the semi-annual report. In addition, gross profit was approximately 75 million USD, down 92.12% from the prior year; net profit attributable to the parent was only about 18 million USD, down 96.76% from the preceding year. This caused alarm in the market, and the Yuzhou Group was then hit by a “double reduction” of stocks and bonds.

According to the analysis of Bo Wenxi, chief economist of global advertising media giant (IPG) in China, the replacement of auditors by listed companies is often a sign of financial problems. The disagreement over audit fees is just an official announcement for listed companies to make. From the respective statements of Hopson and its auditor on this incident, it seems that the two sides had a principled disagreement on some specific issues of financial auditing, resulting in a crisis of market confidence in Hopson and causing the stock price to fall.

China’s real estate crisis continues to spread

The crisis plaguing China’s real estate sector appears to be intensifying in 2022. Property developers face debt payments in the new year that are twice as high as they were in the final months of 2021.

Analysts at Nomura Securities said Chinese developers owe a total of 19.8 billion USD in foreign currency-denominated debt in the first three months of 2022. That’s almost twice the 10.2 billion USD they faced in the last quarter of 2021, a burden that will lead to more developers facing the threat of default.

Michael Pettis, a finance professor at Peking University, said that the situation could turn into a systemic crisis that would devastate the entire debt-ridden economy, becoming a nightmare for Beijing authorities.

On Jan. 14th, Professor Han Fuling from the Central University of Finance and Economics posted on Weibo that a wave of mortgage breaks had begun; the four central banks previously sued 200,000 owners of broken mortgages just after the start of 2022.

The New York Times reported last Dec. 7th that the debt-ridden Chinese real estate market is heading toward a time of reckoning as the deadline for China Evergrande Group and troubled property developer Kaisa to pay millions of dollars in debt approaches.

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