Chinese Drugmaker Discloses $4.4 Billion Accounting Fraud

It looks like China's unstoppable default tsunami is about to claim its latest corporate victim...and thanks to lax oversight that allowed the company to get away with what appears to be a staggering accounting fraud, thousands of unsuspecting investors might be left holding the bag.

According to Bloomberg, Kangmei Pharmaceutical Co., one of China’s largest listed drugmakers, revealed on Tuesday that it had overstated its cash holdings by $4.4 billion. Unsurprisingly, the revelation, which immediately exposed the company to be teetering on the brink of insolvency, sent its shares and bonds tumbling. Its shares, which are a constituent of MSCI's global index, plunged by the 10% daily limit. Its 2.4 billion yuan ($356 million) notes due in 2022 dropped by as much as 60 yuan (about $9).

It's just the latest example of why investors must be wary of Chinese companies due to lax regulations, even as its equity and bond markets are becoming increasingly internationalized. The company's revelation came four months after it revealed that Chinese authorities had launched an investigation into the company.

One of BBG's sources said the restatement is 'unprecedented' in the history of Chinese security markets.

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