China’s biggest foreign asset purchasers are in the crosshairs of Chinese regulators, amidst a Xi Jinping-led effort to root out corruption, reduce money laundering, and curb excessive risk-taking within China’s financial sector.
The China Banking Regulatory Commission (CBRC) last week asked state-controlled banks to assess their credit exposure to several companies involved in overseas acquisitions, according to Caixin, a respected mainland Chinese business magazine. A few banks reduced their holdings of bonds related to these companies.
Companies targeted by the regulator include Anbang Insurance Group Co. Ltd., Dalian Wanda Group Co., HNA Group Co. Ltd., Fosun International Co. Ltd., and a unit of Zhejiang Luosen, which acquired Italy’s AC Milan soccer team in April. The action caused a dramatic selloff of the stocks and bonds of the affected companies last week.
While the full impact of this particular regulatory action is yet to be seen, CBRC’s scrutiny of China’s biggest overseas acquirers is the latest in a string of crackdowns within the financial sector. Sources close to Zhongnanhai, the Chinese Communist Party (CCP)’s central headquarters, told The Epoch Times earlier this year that the Xi leadership is focusing on tackling corruption in the Chinese financial industry in 2017.
In February, Xiao Jianhua, influential billionaire investor and founder of Tomorrow Group, was brought from Hong Kong to Beijing for official questioning. In April, Xiang Junbo, the former head of the China Insurance Regulatory Commission, was placed under investigation. Earlier this month, Wu Xiaohui, chairman of Anbang, was detained by authorities in Beijing.
Anbang, Wanda, HNA, and Fosun are some of the most active and aggressive bidders for overseas assets.
Together, these four companies bought $56 billion in foreign assets over the past five years, according to analysis from the Financial Times. The resulting capital flight has contributed to the devaluation of the Chinese currency—already under pressure from a slowing Chinese economy—while increasing the balance sheets of overleveraged Chinese banks.
Wang Jianlin, founder and chairman of real estate and entertainment conglomerate Wanda and one of China’s richest individuals, has bought Hollywood production studio Legendary Entertainment, cinema chain AMC Theatres, and luxury hotels and residential developments across the United Kingdom, Australia, and the United States. Wanda has extensive connections and influence in Hollywood and is a main conduit of China’s soft-power projection.
Shanghai-based Fosun, whose co-owner Guo Guangchang models himself after investor Warren Buffett, owns Canadian entertainment group Cirque du Soleil, French vacation resort company Club Med, British hospitality firm Thomas Cook Group, and apparel and jewelry labels St. John and Folli Follie.
Billionaire Chen Feng built HNA from a regional airline on the resort island of Hainan into one of the world’s most acquisitive conglomerates. HNA has holdings across the aviation, tourism, logistics industries, and owns California-based technology distributor Ingram Micro. HNA has large stakes in Hilton Hotels and cargo handler Swissport, and is the biggest single shareholder (with 9.9 percent ownership) in Deutsche Bank, the German international banking giant.
Anbang, whose chairman Wu Xiaohui was detained by authorities earlier this month, owns the Waldorf Astoria hotel in New York and has several high-profile real estate holdings across the United States, Canada, and Europe.
Opaque Ownership Structures and Capital Sources
All four companies have something in common—they’re all privately owned.
And some of the companies have complex and opaque ownership structures, as well as highly leveraged capital sources.
HNA’s ownership structure is a complex web of investment trusts, provincial and local government agencies, and small-business ventures. Thirteen individuals ultimately control 76 percent of the company through intermediary companies. Chen Feng, the public face of the company, controls 15 percent of HNA and has connections with former presidential candidate Jeb Bush and American investor George Soros. HNA’s biggest owner, Guan Jun (with a 29 percent stake), doesn’t work for the company and is a relative unknown. Listed addresses for Guan through various public filings and records include a side street beauty salon in western Beijing, a shabby Beijing office building, and a nondescript apartment building in southwest Beijing, according to the Financial Times.
HNA is also highly indebted. At the end of 2014, HNA had a combined debt of 196.9 billion yuan ($29.5 billion) on its balance sheet, compared to only 73.2 billion yuan ($10.9 billion) of equity, according to prospectuses filed with the Irish securities regulators in connection with a 2015 $1 billion bond offering of one of its subsidiaries.
Anbang’s funds come from sales of controversial high-yield products called universal life policies, or risky wealth management products that combine bonds and life insurance policies. These products differ from typical annuities as they promise very high returns to investors, something typical insurance companies cannot justify given the conservative nature of their asset holdings. Sales of such products have been recently banned by China’s insurance regulator.
Anbang’s capital base suddenly swelled in 2014, with a number of mysterious investors injecting a total of 50 billion yuan into the company. Research by Caixin found that some of Anbang’s 39 investors are obscure outfits such as auto dealerships, real estate firms, and mine operators that sometimes use shared mailing addresses, many of which are connected to Wu. There’s also a trend of major state-level investors scaling back their ownership, with SAIC Motor Corp. and Sinopec Group decreasing their ownership levels from 20 percent each to 1.2 percent and 0.5 percent, respectively.
Intersection of Business and Politics
Business and politics in the Chinese regime have always been closely intertwined. And Anbang chairman Wu’s detention earlier this month appears to be partially politically motivated.
A source close to high-level discussions in Zhongnanhai told The Epoch Times that Wu has close ties to the family of Zeng Qinghong, the former Chinese vice chairman and right-hand man of former Communist Party boss Jiang Zemin.
Jiang headed the CCP for more than a dozen years (1989–2002) and continued holding sway over the Chinese regime through a network of cronies for another 10 years (2002–2012). Since entering office in 2012, Xi has sought to uproot the influence of Jiang and his faction, who oppose Xi, and consolidate his control over the Chinese regime.
The source said that Wu used financial transactions to funnel and launder funds abroad on behalf of the Jiang faction, while at the same time using his role as a business tycoon to spy on and influence foreign dignitaries.
Whether last week’s inquiry into China’s other major overseas asset acquirers is connected to the reining in of powerful Chinese financiers ahead of a CCP’s 19th National Congress, a key political conclave to be held at the end of the year, is still unclear. For now, major Chinese state-controlled banks have declared no intention of ending relationships with or cutting credit to these companies.
Nonetheless, investors were rattled by the regulatory announcement.
HNA Holding Group stock fell 6 percent, while shares of Fosun International Ltd. fell almost 10 percent in Hong Kong on June 22. On the same day, Fosun Pharmaceutical, listed in Shanghai, fell around 8 percent, while the Shenzhen-listed Wanda Film dropped as much as 9.9 percent in the morning and had to be temporarily halted from trading.