A $6.2 billion accounting error burns investors in China


One of China’s largest listed drugmakers said it overstated cash holdings by $4.4 billion ($6.2 billion), sending its shares and bonds tumbling and heightening concerns about the quality of accounting in a country that has become a fast-growing part of global investment portfolios.

The news sent the company's shares tumbling.

The news sent the company’s shares tumbling. Credit:Bloomberg

Kangmei Pharmaceutical, a producer of traditional Chinese medicines, disclosed what it called an accounting “error” in an exchange filing on Tuesday, about four months after telling investors that it was being investigated by regulators. The stock, a constituent of MSCI Inc.’s global indexes, plunged by the 10 per cent daily limit. Kangmei’s 2.4 billion yuan ($510 million) notes due 2022 fell as much as 14 yuan to 60 yuan.

The immense size of Kangmei’s restatement, described by one securities lawyer as unprecedented for China, puts a spotlight on disclosure practices in a country where companies are defaulting at a record pace and several instances of questionable accounting have emerged in recent months. The issue has become increasingly important for global investors and securities firms as they gain unprecedented access to China’s gargantuan stock and bond markets.

“Investors have to be more careful about Chinese firms’ reporting,” said Andrew Lam, a director at BDO, an international accounting firm. “They will have to do real homework, examining closely companies’ financial reporting for any potential irregularities.”