Banking & Finance

A serious headache

Regulator attacks corporate governance violations at top Chinese firm

A serious headache

Totally transparent: the product, but not the company accounts

Wuliangye markets itself as the “quintessence of the heaven, the earth and the human”.

Post-quintessence, it can also produce the mother of all hangovers.

Any Western business executive who has done business in Sichuan province will be familiar with this five grain liquor, which is usually rolled out for ceremonial toasts at banquets.

Wuliangye’s baiju (Chinese wine) vies with Moutai for top spot in the country’s spirits market. Established in 1909, the distiller claims the brew’s ancestry can be traced back over 3,000 years.

Wuliangye may have a long and successful track record in making Chinese wine – and on balance it probably should have stuck to what it knows best. Indeed when it tried investing in the stock market, its experience proved nothing short of disastrous. The company is currently in the spotlight for hiding its trading losses and is the subject of an ongoing investigation by the China Securities Regulatory Commission (CSRC).

The timing of the probe is significant. The launch of ChiNext, the country’s new growth enterprise board – see this week’s Talking Point – is renewing the debate about Chinese listed firms (sometimes) flaky corporate governance. By investigating a company as high profile as Wuliangye, the CSRC is trying to underline the point.

CSRC has already released some fairly damning information. For example, in 2007 Wuliangye Yibin – the Shenzhen listed entity – reported that one of its subsidiaries made Rmb1 billion ($146 million) more revenue than was actually the case. Nor did it later correct the mistake in its financial statements.

But the local media has become more fixated with Wuliangye’s decade long attempt to play the stock market.

Many of its reporting violations occurred as it tried to hide evidence of the losses it incurred.

The worst were between 2000 and 2005, when Wuliangye gave broking firm China Sci-Tech Securities Rmb130 million to bet on A-shares. Five years later the broker had lost Rmb42 million of its client’s money and gone bankrupt.

Wuliangye only recouped Rmb5.2 million of its original investment. But the investor community knew nothing of this; the CSRC notes that Wuliangye didn’t even accrue an impairment provision in its financial reports.

The China Weekly reckons the most damning evidence will relate to punts on Wuliangye’s own stock.

In a suspected case of insider trading, about Rmb80 million was given to Chengdu Securities in 2001 to buy the company’s scrip ahead of an announcement on bonus shares. China Weekly calls it a “crazy self-speculation” in which Wuliangye reportedly lost Rmb15 million when the stock fell. It says much about the company’s stock savvy that it (allegedly) couldn’t even make money trading on its own shares.

The National Business Daily is among those scandalised: “How could it conceal all this for so long? Why did it take so long to get discovered? How many investors were deceived during this period?”

The company’s stock fell 10% in the 48 hours after the CSRC announcement. If that doesn’t get the company’s management reaching for a stiff drink, the regulator’s final verdict almost definitely will.

Keeping track: Back in WiC36 we reported that investors in Wuliangye Yibin – the maker of the eponymous Chinese liquor – must have been reaching for a stiff drink following repeat revelations of flawed corporate governance at the

baijiu maker.

Over a year and a half later, and the China Securities Regulatory Commission has published its report on the scandal, which related primarily to unauthorised share trading by the company’s executives.

The findings? That the company had failed to disclose investments that it had made with two brokerage houses; that it had erred in reporting data in its 2007 annual report (and then in failing to correct it); and that Wuliangye had said nothing even when one of its directors was taken into police custody for insider trading.

Still, the CSRC hardly threw the book at Wuliangye in terms of penalties. The company was fined Rmb600,000, with additional smaller fines for its chairman and two other executives.

They’ll probably be raising a glass themselves, in relief.(3 June 2011)

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