Citron Research Short Seller Andrew Left on Evergrande Debt Crisis
Andrew Left, Founder and CEO of Citron Research
Adam Jeffery | CNBC
Andrew Left, an American short seller banned from trading in Hong Kong for a damning report he wrote about Evergrande years ago, said the Chinese real estate developer’s debt crisis was “long lasting.”
But he told CNBC he doesn’t think the Evergrande situation points to a widespread problem for China.
“The Evergrande situation was a long time coming and China had to get rid of this from its system. It’s not a Lehman moment and it’s not systemic,” Left told CNBC in an email.
He was referring to the collapse of Lehman Brothers in 2008, the world’s fourth-largest investment bank at the time, which filed the largest corporate bankruptcy in US history. This bankruptcy spread to other banks, triggering the global financial crisis.
Left, the founder of Citron Research, was banned from trading in Hong Kong markets after he released a 2012 report predicting Evergrande would soon be insolvent.
His five-year ban ends next month.
In an email interview with CNBC, Left said, âEverything I have discussed, from influence to corporate governance has turned out to be true, and instead of considering my report, the SFC â¦ Forced me to spend millions to defend myself. “
He was referring to the Hong Kong Securities and Futures Commission (SFC), which claimed Left had published a report containing “false and misleading” information about Evergrande, including his accusation at the time that the property developer was indulging to accounting fraud.
Following the SFC’s allegations, the Hong Kong Market Misconduct Court found Left to be guilty. The tribunal is an independent body that reviews cases of market misconduct, including insider trading and stock market manipulation.
Left’s accusations – that Evergrande was insolvent and committed accounting fraud – seem never to have been proven. The court rejected in 2015 his request for production of records and documents from Evergrande.
Evergrande was not available for comment when contacted by CNBC. CNBC has contacted the Hong Kong Securities and Futures Commission, which declined to comment on the report.
The escalating crisis in Evergrande – the world’s most indebted developer, with $ 300 billion in liabilities – rocked global markets this week. The company is the second-largest Chinese developer in terms of turnover and has a strong presence in the country, operating in sectors ranging from real estate to electric vehicles and healthcare services.
Evergrande has said he could default on his debt, with a large $ 83 million interest payment due Thursday. Analysts also warned that it would likely default. Investors are watching developments closely, amid contagion fears that could spill over to other markets.
Left said that Evergrande’s current liquidity crisis proves he was right when he wrote his 52-page report in 2012. Short selling is an investment strategy that involves selling borrowed stocks from a share, in the hope of buying them back at a lower price. and earn money from the difference.
â10 years ago, I wrote about how the company plays fast and freely with debt and uses aggressive accounting to hide its true financial health. I continued to talk about how the company’s favorite projects cost money. billion dollars in all off-balance sheet financing, âLeft said. .
âNow everything I wrote has come true and the Chinese people are suffering. It shows the importance of free speech and short selling in the markets,â Left said.
Angry Chinese investors have shown up at protests in recent weeks demanding their money back. Foreign investors, which include major asset managers around the world, are waiting to see if Evergrande will be able to pay two interest payments due Thursday and next week.
“China has a plan”
The crisis will wipe out the company’s stock, Left predicted.
âThe stocks are worth nothing to Evergrande and the bonds are questionable,â he said. Evergrande shares have fallen more than 80% since the start of the year and its bond yields have skyrocketed. Bond yields and prices move in opposite directions: the higher the yield, the lower the bond price.
Even though the Chinese developer is in serious trouble, Left said the impact will be limited.
âChinese banks will take a manageable hit and people will have a government-assisted landing,â he said. “I think it’s not systemic and won’t affect future investment in China or Hong Kong. I think the regulation of the tech sector is a lot scarier than that.”
“I believe China has a plan to unravel this. It might not be pretty, but it takes time and they will save the system from the bottom up,” he added.
Left’s rebuttals to Hong Kong regulators’ decision
Left was banned from trading on the Hong Kong stock markets in 2016, after the city’s market misconduct court found him guilty of market misconduct in connection with the Evergrande report.
The court also ordered him to repay 1.6 million Hong Kong dollars ($ 205,000) he had earned from short-selling the stock.
Here’s what Hong Kong regulators claimed he did – and his rebuttal at every point.
1. Market misconduct
Regulators accused Left of market misconduct in releasing the report. In the report, he said Evergrande was insolvent and defrauded investors. The court said Left’s claims were false and misleading.
Left said the report said Evergrande was or “soon will be” insolvent because the company’s cash flow “cannot handle” the amount of debt and off-balance sheet activity.
“I backed him up with photos and testimonials from nationwide protests. Their claim was ludicrous. I think we are seeing it now,” he said, referring to the current liquidity crunch.
âNow look at who is paying the price – the poor employees and the people who trusted Evergrande with the deposits,â he said.
2. Lack of knowledge of local accounting practices
Regulators said Left had little knowledge of local accounting standards and financial reporting, and that he had not checked with experts or the company to verify the information he received.
Left says he was using GAAP, a common set of accounting principles and standards published by the United States Financial Accounting Standards Board that companies listed in the United States must follow.
“The fact that I was using GAAP standards and not Hong Kong accounting [standards] on a few data points does not negate the tone or message of the report, âhe said.
He told CNBC the courts would not allow him to question Evergrande’s CFO or the company when faced with the allegations.
âI had a trial where I wasn’t even allowed to question the company. It was so one-sided,â he said.
The court accused Left of being negligent in publishing the report.
Left insisted he was not neglectful. “What if I were, are they going to lay charges against every investment bank that has a target of $ 30 on the stock and has generated huge bank fees without looking at the evidence?” he asked in the email. “It’s neglect.”
Evergrande stock was at 2.58 Hong Kong dollars ($ 0.33) on Thursday morning, after falling more than 80% year-to-date.