Liu Minxia

    mllmx@msn.com

    THE unexpected decision not to delist a fraudulent ChiNext firm from China’s NASDAQ-style board for growth enterprises has sparked an outcry among stock investors.

    Sending shockwaves through China’s finance sector with one of the worst frauds in the country’s stock-trading history, Wanfu Biotechnology (Hunan) Agricultural Development Co. was fined merely 300,000 yuan (US$47,600) after it was found to be the first ChiNext company to have inflated its books for an initial public offering (IPO).

    Investors are accusing the China Securities Regulatory Commission’s (CSRC) rulings on the perpetrator of such an alarming fraud of being too lenient, although Gong Yongfu, Wanfu Biotechnology’s chairman, also was fined 300,000 yuan and 19 other managers received fines ranging from 50,000 yuan to 250,000 yuan.

    “Wanfu Biotechnology should be held liable first and foremost in this case,” said Pi Haizhou, a renowned stock commentator. “Such light penalties will fail to send warnings to followers, and as a result, lead to more frauds, which will ruin the reputation of China’s stock market as well as the market itself.”

    “Punishments must be made harsh enough so that the price of cheating is too high to afford,” said Ma Shijie, board chairman of SNG Fund.

    Many investors expected regulators to expel Wanfu Biotechnology to fulfill their pledge to cleanse the troubled ChiNext market of poorly performing stocks and help restore investor confidence after rolling out tougher ChiNext delisting rules in April 2012.

    Stocks would be delisted if their prices fell below their baseline value for 20 consecutive trading days. Firms would also be jettisoned from the bourse if they have been censured three times for irregular practices or misrepresenting their assets, the rules say.

    Wanfu Biotechnology had been publicly censured by the Shenzhen Stock Exchange twice. A spokesperson for the CSRC told a press conference Friday that requirements to delist Wanfu Biotechnology were not fully met.

    “To my surprise, Wanfu Biotechnology has not been delisted after committing such a huge fraud,” said Huang Sheng, a Shenzhen-based independent stock analyst. “How ridiculous it is for regulators to keep such a firm on board on the one hand, while aiming to transform China’s IPO market into a market-oriented system on the other hand. IPOs should not be resumed before Wanfu Biotechnology is delisted.”

    Some investors likened the Wanfu Biotechnology case to the Enron scandal in 2001, which led to the bankruptcy of Enron Corp., a leading U.S. energy company, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world.

    “Top management of Enron was sentenced to jail terms of more than 20 years,” said Fudan University professor Li Ruoshan.

    From 2008 to 2010, Wanfu Biotechnology inflated its revenue by 460 million yuan and its net profit by 113 million yuan, the CSRC said Friday. In its 2011 and 2012 half-year financial reports, it also exaggerated its revenues and net profits.

    ChiNext has proved a disappointment to investors. The combined profit growth of ChiNext companies, which slipped to -7.13 percent last year from 50.18 percent in 2009, tumbled for three straight years since the board was launched in 2009.

    In stark contrast, major shareholders of ChiNext firms — often top management — have put about 9 billion yuan in their pockets by selling their holdings since the beginning of this year.