Over the last couple of months, we have witnessed the collapse of a number of China’s juggernauts, like Anbang (an insurance company with a knack for hotel businesses, paying USD 1.4 million per room for New York’s Waldorf Astoria), Dalian Wanda (a property developer that diversified into cinemas and movie production), Fosun (originally a pharma company and co-owner of Club Med, a tired French holiday camp formula; led by Guo Guanchang, known as China’s Warren Buffett) and HNA (a company that started out as a small airline in Hainan and ended up with a 9.9% stake in Deutsche Bank), that, seemingly randomly, were buying assets globally by using an excessive amount of leverage. In itself, it is not surprising that these companies crashed to earth (see our blog “Chinese Emperors without Clothes?”, published 2 years ago). However, the government’s role is. It seems that China’s private companies are not so private after all.
The Real Emperor…
Mid last year, China’s bank regulator ordered lenders to assess exposures to companies involved in overseas buying sprees. Soon thereafter, Dalian Wanda was forced to offload onshore hotel properties and theme parks to rival developers Sunac and Guangzhou R&F and said that it would “actively respond to the state’s call and decided to put its main investments within China”. Guangzhou R&F apparently has better connections than Dalian Wanda as they also were allowed to buy London’s One Nine Elms development from Dalian Wanda in January of this year. Other companies with excess cash are also called upon to help out. A consortium including Tencent, the internet company, bought a stake, worth USD 5.4 billion, in Dalian Wanda’s commercial property business. Alibaba, another internet company, and Cultural Investment Holdings (a film consulting company that started out as an auto parts manufacturer in the 1990s) bought a 12.8% stake in Dalian Wanda’s film unit for USD 1.24 billion. It is questionable whether Alibaba and Tencent would have made these investments voluntarily.
In order to instill appropriate selling discipline, authorities have detained company executives for a dressing down (customarily subsequently denied by the executives involved). Both Fosun’s Mr. Guo and Dalian Wanda’s Mr. Wang announced asset sales and praised their focus on China after such encounters. Anbang’s chairman Wu Xiaohui fared worse as he has not been seen anymore after his detention last year. This month, the government seized control of his company for at least one year, stating that it had violated laws and regulations “which may seriously endanger the solvency of the company”. Anbang with USD 315 billion in assets is a prolific issuer of shadow banking products (also known as pyramid schemes with names like “Longevity Sure Win No.1”; Mr. Wu has been indicted for fundraising fraud and embezzlement) to fund its business, although the regulator (already involved in running the company since June last year) stated that the company’s operations are “generally stable”. Nevertheless, it felt that expropriation of the company was inevitable. New “strategic” shareholders will be asked to prop up solvency in the coming months. Don’t be surprised if Alibaba ends up owning the Waldorf Astoria.
Free Wifi…
Although the regulator’s intervention into Anbang most surely is deserved, the fact that China’s command economy is increasingly encroaching on the private sector is a worrying development as this might result in bad and opaque capital allocation decisions. Xi Jinping has been very clear: the Communist Party is the leader of all (and Mr. Xi is the absolute Party leader). Some private companies already have established Party committees in their governance structure and may feel obliged to participate in political projects, like “One Belt, One Road”. As a consequence, returns on capital achieved by private firms may drop to the mediocre levels attained by their state-owned peers. Investing in China doesn’t get easier…
