Why is Kangmei Pharmaceutical, found to have committed one of China’s biggest financial frauds, rallying?
- Regulator imposes tiny fine, does not signal Kangmei Pharmaceutical will be delisted
- Shows light punishment gives companies ‘great motivation’ to cheat, analyst says
Kangmei Pharmaceutical, found by regulators to have engaged in one of China’s largest financial frauds totalling US$12.6 billion, has seen its shares surge by 17.3 per cent this week, after it got a slap-on-the-wrist fine and may not face delisting.
“This is a perfect example that shows when the cost is too small for a financial fraud, companies will have great motivation to do it,” said Ma Jinghao, a visiting professor to Central University of Finance and Economics in Beijing.
“Investors sold off their holdings of Kangmei earlier, believing the violation should be serious enough to trigger a delisting of the firm. But now many feel Kangmei was oversold, given the hope was kept alive that Kangmei will remain listed,” he added.
Recent fraud scandals, from Kangmei in China to General Electric in the US, highlight how fragile auditing can be, because the relationship formed between the service provider and the client does not necessarily lead to an independent inspection of the books, Ma said.
The China Securities Regulatory Commission (CSRC) wrapped up an 10-month investigation into Kangmei on August 16. After the markets closed that day, the securities regulator announced Kangmei had been involved in “premeditated and malicious cheating of investors”, with long-term planning.
