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Citron Research short seller Andrew Left on Evergrande debt crisis


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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 on Evergrande years ago, says the Chinese property developer’s debt crisis was “a long time coming.” 

But he told CNBC he doesn’t think Evergrande’s situation indicates a widespread problem for China.

“The Evergrande situation was a long time coming and China needed to rid this from their system. This is not a Lehman moment and this is 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 that time, which filed the largest corporate bankruptcy in U.S. history. That bankruptcy spilled over to other banks, triggering the global financial crisis.

Left, the founder of Citron Research, was banned from trading in the Hong Kong markets after he published a 2012 report predicting that Evergrande would soon be insolvent.

His five-year ban ends next month.

In an email interview with CNBC, Left said: “Everything I discussed from leverage to corporate governance turned out to be true, and instead of considering my report the SFC … forced me to spend millions defending myself.”

He was referring to Hong Kong’s Securities and Futures Commission (SFC), which alleged that Left published a report with “false and misleading” information on Evergrande, including his accusation at the time that the property developer was engaging in accounting fraud.

Following the SFC’s allegations, Hong Kong’s Market Misconduct Tribunal concluded that Left was guilty. The tribunal is an independent body that looks into cases of market misconduct, including insider trading and stock market manipulation.

I believe China has a plan to unwind this. It might not be pretty but it is a long time coming and they will save the system from the bottom up.

Andrew Left

founder of Citron Research

Left’s accusations — that Evergrande was insolvent and committing accounting fraud — appear to have never been proven. The tribunal in 2015 rejected his application to produce records and documents from Evergrande.

Evergrande was not available for comment when contacted by CNBC. CNBC reached out to the Hong Kong Securities and Futures Commission, which declined to comment for this report.

The escalating crisis at Evergrande — the world’s most indebted developer, with liabilities of $300 billion —roiled global markets this week. The firm is China’s second-largest developer by sales and has a huge presence in the country, dabbling in industries ranging from real estate to electric vehicles and health-care services.

Evergrande has said it may default on its debt, with one large interest payment of $83 million due on Thursday. Analysts have also warned it will likely default. Investors are watching the developments closely, amid fears of contagion that could spread to other markets.

Left said Evergrande’s current liquidity crisis demonstrates that he was right when he wrote his 52-page report back in 2012. Short-selling is an investment strategy that involves selling borrowed shares of a stock, with the hope of buying them back at a lower price and making money from the difference.

Read more about China from CNBC Pro

“10 years ago, I wrote how the company is playing fast and loose with debt and using aggressive accounting to masquerade its true financial health. I continued to say how the company’s pet projects are costing billions in all off balance sheet financing,” Left said.

“Now everything that I wrote about has come to be true and the Chinese people are suffering. This shows the importance of freedom of speech and short selling in markets,” Left said.

Angry Chinese investors have shown up at protests in recent weeks, demanding their money back. Overseas investors, which include major asset managers globally, are waiting to see if Evergrande will be able to pay out two interest payments due Thursday and next week.

‘China has a plan’

The crisis will wipe out the company’s stock, Left predicted.

“The equity is worthless in Evergrande and bonds are questionable,” he said. Evergrande shares have plummeted more than 80% year-to-date, and yields on its bonds have shot up. Bond yields and prices move in opposite directions — the higher the yield, the lower the bond’s price.  

Even though the Chinese developer is in serious trouble, Left said the impact will be limited.

“Chinese banks will take a manageable hit and the people will have a landing helped by the government,” he said. “I do believe this is not systemic and will not affect future investments in China or Hong Kong. I think the tech sector regulation is a lot scarier than this.”

“I believe China has a plan to unwind this. It might not be pretty but it is a long time coming and they will save the system from the bottom up,” he added.

Left’s rebuttals to Hong Kong regulators’ ruling

Left was banned from trading in Hong Kong’s stock markets in 2016, after the city’s Market Misconduct Tribunal found him guilty of market misconduct in relation to the Evergrande report.

The tribunal also ordered him to repay 1.6 million Hong Kong dollars ($205,000) that he made from shorting the stock.

Here’s what Hong Kong regulators alleged he did — and his rebuttal to each point.

1. Market misconduct

Regulators accused Left of market misconduct in publishing the report. In the report, he said Evergrande was insolvent and had defrauded investors. The tribunal said Left’s assertions were false and misleading.

Left said the report stated that Evergrande was insolvent or “will be soon,” as the firm’s liquidity “cannot handle” the amount of debt and off-balance sheet activities.

“I backed it up with pictures and testimonials from protests nationwide. Their claim was ridiculous. I think we see that now,” he said, referring to the current liquidity crisis.

“Now look who is paying the price — the poor employees and people who trusted Evergrande with deposits,” he said.

2. Lack of knowledge about local accounting practices

Regulators said Left had little knowledge of local accounting standards and financial reporting, and that he failed to check with experts or the firm to verify information he received.

Left claims he was using GAAP standards, a common set of accounting principles and standards issued by the U.S. Financial Accounting Standards Board, which listed companies in the U.S. have to follow.

“The fact that I was using GAAP standards and not Hong Kong accounting [standards] on a few data points does not nullify the tone or the message of the report,” he said.

He told CNBC the courts wouldn’t allow him to question Evergrande’s chief financial officer or the firm when he faced the allegations.

“I had a trial where I was not even allowed to question the company. That was so beyond one sided,” he said.

3. Negligence

The tribunal accused Left of being negligent in publishing the report.

Left insisted he was not negligent. “And if I was, are they going to bring charges against every investment bank who has a $30 target on the stock who have generated huge banking fees while not looking at the obvious?” he asked in the email. “That is negligent.”

Evergrande’s stock was at 2.58 Hong Kong dollars ($0.33) as of Thursday morning, having plummeted more than 80% year-to-date.

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