Singapore wealth fund suing Chinese EV maker for faulty disclosure, raising wider concerns about China’s corporate accounting
It was a blow to an industry whose rise had seemed inexorable. On October 16, Singapore’s sovereign wealth fund, GIC, announced that it would sue China’s NIO, an electric vehicle (EV) maker, over allegedly fraudulent accounting practices.
That same day, NIO’s shares tumbled by a dramatic 13.8%. While they have partially rebounded since, the coming legal showdown could severely tarnish the reputation of not only the company but also China Inc’s global corporate brand and credibility.
Since its founding in 2014, NIO has decisively established itself as a formidable mid-sized player in the EV sector. While its global market share might appear modest at 1.6%, the company trails closely behind household names such as Hyundai and BMW, and has maintained a robust foothold in Europe for a decade. Its growth has also been striking, with 221,970 vehicles sold in 2024 — a 38.7% year-on-year increase and totalling almost a third of all deliveries to date.
The creation of Weineng in 2019 also hints at NIO’s innovative business model. The Battery as a Service (BaaS) enterprise was formed as a joint venture between NIO and three other firms, allowing consumers to purchase NIO vehicles without batteries and lease them separately from Weineng.
This approach lowers upfront costs by tens of thousands of dollars while replacing one-time payments with a monthly subscription fee, thereby generating a reliable revenue stream for NIO.
Fact-checking the figures
Conversely, this strategy now lies at the heart of GIC’s legal case against the EV manufacturer, which is set to be heard in American courts. The Singaporean wealth fund’s first claim is that NIO unlawfully recognized battery sales earnings from Weineng upfront, instead of recording them in line with monthly lease payments.
According to Grizzly Research, this practice pulled forward seven years’ worth of revenue, thus inflating NIO’s figures by more than US$600 million and unjustifiably propelling its share price to $62 in early 2021. Moreover, GIC alleges that Weineng’s “abysmal” asset-to-liability ratio of 0.36 during that period made it unlikely that NIO could realize that revenue in practice.
Secondly, GIC contends that Weineng should not have been treated as an independent firm but rather as a “variable interest entity”, whose financial results should have been consolidated with NIO’s rather than considered external revenue.
GIC argues that NIO has exerted outsized influence within Weineng’s activities, pointing to its appointment of senior managers and temporary ownership of up to 55% due to a 1.5 billion yuan ($210 million) debt owed by Weineng.
This lawsuit highlighted frequent allegations raised by American policymakers: that Chinese firms – from Luckin Coffee to Cloopen Group – routinely manipulate their balance sheets to increase investor appeal.
For instance, former Securities and Exchange Commission (SEC) chair Gary Gensler argued that 270 Chinese businesses were violating American financial legislation in 2021. This year, top Republican officials from 21 states requested that the SEC investigate whether certain Chinese companies should be delisted from US stock markets due to concerns about the quality of their financial disclosure.
The 2019 Kangmei Pharmaceutical scandal underpins many of these complaints. While the corporation was found to have overstated its revenue by 29 billion yuan ($4.07 billion), the punishment was minimal; the firm was fined 600,000 yuan ($84,000), or less than 0.01% of the inflated revenue. Several employees received penalties ranging from 100,000 to 900,000 yuan ($14,000–$126,000).
Market observers noted that such leniency may have led the company’s shares to rise by 17.3% over the following week, hitting the maximum daily limit of 5% four times in that period.
Regulatory holes
While regulators do occasionally levy harsh penalties, these are often perceived as disproportionately targeting foreign enterprises, such as the record 441 million yuan ($62 million) fine against PwC’s Chinese subsidiary for allegedly “condoning” fraud when auditing heavily indebted property developer Evergrande.
Although China’s regulatory environment has evolved to align more closely with International Financial Reporting Standards, significant limitations remain. China’s Ministry of Finance and Securities Regulatory Commission are not fully independent and may need to balance government interests with impartial oversight – unlike the more autonomous SEC in America and the Financial Reporting Council in the United Kingdom.
Meanwhile, the content of such legislation in China still appears less comprehensive than that of America’s long-standing Sarbanes-Oxley Act. While US firms follow stringent Generally Accepted Accounting Principles (GAAP), Chinese Accounting Standards (CAS) might create opportunities for manipulation by allowing managers more discretion in their financial reporting.
Moreover, while China’s “Securities Law” is intended to protect civil liabilities, investors are not always compensated due to gaps in litigation mechanisms, and criminal prosecution of fraudulent executives is less common than in America.
Chinese public companies are also only required to submit semiannual reports, whereas US businesses file quarterly, a comparative lack of visibility that can allow discrepancies to go undetected for longer. When considering China’s broader regulatory gaps, deficiencies in accounting laws may further undermine investor confidence.
For example, earlier this year, Guangzhou Construction was fined 1.75 million yuan ($240,000) for carrying out a merger without prior government approval. The punishment was widely viewed as a slap-on-the-wrist when compared to the corporation’s 14.3 billion yuan ($1.9 billion) market capitalization.
Mind the financial gap
The NIO case, therefore, risks heightening investor skepticism towards the quality of Chinese assets, particularly since a major investment institution like GIC failed to detect the alleged fraud for several years.
It also reflects a broader trend: even the most diligent investors can suffer heavy losses from corporate deception, as UBS and Jeffries did just last month when First Brands Group filed for bankruptcy due to reportedly double-pledging invoices to multiple investors.
In a corporate environment where financial wunderkinds can suddenly turn out to be paper tigers, shareholders in Chinese companies would do well to stay alert and guarded.
Sean Tan is an International Relations and History student at the London School of Economics and intern at the Oxford Global Society. A former King’s Scholar at Eton College, he has also written articles for the Global Taiwan Institute, Yale’s undergraduate US-China magazine ‘China Hands’, Oxford Political Review and several other notable publications.