China Markets

One of China's biggest pharma stocks is falling in value by 10% every day

Key Points
  • Kangmei Pharmaceutical stock is falling in value by 10% every day.
  • The firm has admitted a major error in reporting its 2017 cash position.
  • Chinese trading rules mean the stock can only fall a maximum 10% for every session.
A woman sorting medicine in the pharmacy of the Yueyang Hospital, part of the Shanghai University of Traditional Chinese Medicine, in Shanghai.

Shares of a Chinese pharmaceutical firm, which admitted overstating cash holdings by $4.4 billion, have fallen by around 10% every day since the "error" was first revealed.

On April 30, Kangmei Pharmaceutical, said in a filing to the market its 2017 cash position had been overstated. The stock immediately slumped 10% before the day's losses were limited by Chinese trading rules.

In every subsequent trading day since the filing, and amid a wider sell-off for Chinese indexes, the firm's share price has opened for trade before immediately falling by the 10% limit before being halted. The stock is now down 25% year-to-date and it's also seen the value of its corporate bonds plummet.

Company chairman and founder, Ma Xingtian, described the overstatement as an "accounting error" that had come about after rapid expansion had "led to loopholes in internal control and financial management."

The China Securities Regulatory Commission (CRSC) has previously asked the company to explain why interest accruing from its stated cash holding was so low. Following the latest revelations, the CRSC is yet to rule on whether the firm will now be delisted from the Shanghai Stock Exchange.

Institutional owners of the Chinese pharmaceutical company include funds run by Norway's sovereign wealth giant, Norges Bank Investment Management.

Kangmei, a producer of traditional Chinese medicines, is the latest example of firms in China that have suddenly revealed poor trading positions.

Defaults for Chinese corporate bonds — issued in both U.S. dollars and the Chinese yuan — soared last year, according to numbers provided to CNBC by both Singapore bank DBS and Japan's Nomura bank.

Firms in China are facing tighter monetary conditions and are finding it harder to rollover their borrowing to pay down debt.

On Monday, the People's Bank of China (PBOC) slackened the reserve requirement rules on Chinese banks, in a bid to encourage lending to cash-strapped firms. However, encouragement from Beijing is not proving to be a guarantee of success.

"Availability of credit for refinancing remains tight despite repeated monetary easing by (the) PBOC," DBS has previously said, before adding: "Commercial banks have remained cautious in lending to private companies and financially wobbly state-owned enterprises."

At the same time, Chinese lawmakers have attempted to rein in lending by the country's shadow banking sector which has created a credit crunch for firms that can't issue bonds.