China Signals A Crackdown On Corporate Debt Appetite

China’s top leader has a message for his country’s biggest dealmakers that could reverberate across the world: Get your debt under control — or else.

In a forceful statement about the country’s changing priorities, the government seized control of Anbang Insurance Group, the heavily indebted Chinese company that spent billions buying businesses and properties around the globe like the storied Waldorf Astoria hotel.

For years, Beijing encouraged big Chinese companies to invest overseas, spreading the country’s wealth and influence beyond its borders. The money transformed global markets and industries.

Now, the government wants to rein them in, worried that the debt-fuelled spending spree could curtail the country’s growth. A concern is that the companies’ big borrowing binge could weigh on the country’s financial system.

The action against Anbang shows China’s companies, banks and other pillars of the country’s economy that President Xi Jinping has embraced financial stability and is serious about curbing China’s addiction to debt. As part of the move, the government also charged Wu Xiaohui, Anbang’s highflying and politically connected former chairman, with engaging in fraudulent fund-raising and taking company assets.

“All of the animals have now witnessed Wu’s pyre,” said Brock Silvers, the chief executive of Kaiyuan Capital, a Shanghai investment advisory firm, “and everyone in the zoo now understands the message.”

By moving aggressively and publicly, China’s government may give regulators in other countries new reasons to question the political connections and financial backing of Chinese companies hoping to make overseas deals, lest Beijing emerge as an unwelcome new landlord should times get tough. Authorities in the US, Europe and elsewhere have already been ramping up their scrutiny of Chinese deals.

Strategic and prosaic purchases

Any slackening in the pace of buying could cool deal-making and disappoint investors who have reaped windfalls thanks to profligate Chinese spenders. In recent years, Chinese money has helped drive up the prices of real estate, oilfields, hotels and just about any other asset that big companies buy and sell.

The purchases have included the strategic (global agribusinesses and energy companies) and the prosaic (movie theatres and video games). Anbang’s corporate empire includes major financial firms in South Korea and the Netherlands, as well as properties worth billions of dollars.

The buying binge could not last. Many of China’s deals in recent years depended on cheap money, and Chinese officials have become increasingly nervous about debt. China borrowed heavily to fuel a decade of growth, accumulating trillions of dollars of debt that put it on a level comparable to the US, relative to overall size of the two countries’ economies.

Chinese officials appeared reluctant to pare back at the risk of curbing growth and provoking unrest — until now at least. Since Xi consolidated his power at an important Communist Party meeting in October, Chinese officials have gotten more vocal about tackling the debt issue, and have threatened to crack down on the worst offenders.

In a statement, Anbang said it supported the takeover and would remain private, despite government oversight. “Our business and operations are stable,” the company said. “We are confident that this stable operation will continue under the interim management working group and in the long term.”

Chinese state media and other official channels provided little guidance about why Beijing had taken over Anbang or what government ownership might mean. Experts said such a drastic step would have required approval at the highest levels of government.

Freewheeling types

Anbang is in some ways a fitting example of what might be called China Inc. Begun as a modest car insurance company in 2004, it used cheap debt and financial engineering — sometimes borrowing directly from individuals with promises of big returns — to build a juggernaut in just a few years. Risk may have built Wu’s empire, but it also led to the company’s downfall.

Anbang has personified a freewheeling type of Chinese dealmaker like Dalian Wanda Group, Fosun International and HNA Group. The push appeared to enjoy official approval initially. Xi stayed at the Waldorf Astoria during a stop in New York three years ago.

Now, under official pressure, many of the companies — a group referred to as the “grey rhinoceroses”, big problems that are ignored until they start moving fast — are unloading assets. Dalian Wanda last year shed billions of dollars worth of property investments. HNA is paring properties amid analysts’ questions about how it will meet its heavy debt obligations.

As official scepticism of Anbang grew, so did public scepticism. But many Chinese regulators had been hesitant to act aggressively, and the pace of enforcing discipline had been slow. With Anbang, the Chinese government may have hoped to set an example, by seizing control rather than engineering a quiet injection of cash from a pliant state company.

“Xi’s concern about financial risk has had a lot of impact on the behaviour of a lot of banks, regulators and companies,” said Victor Shih, an associate professor at the University of California, San Diego, who studies Chinese politics and finance. “You have seen the regulators being very cautious, and being maybe more pre-emptive than they would have been without this political pressure from the highest levels.”

Despite the government pressure, Chinese deal-making is unlikely to completely end, given the country’s vast sums of money and global ambitions. China has continued to support acquisitions in strategic areas like energy and technology. Fosun, widely considered a “grey rhino”, said it had acquired a majority stake in Lanvin, the French fashion house.

Renewed scrutiny

China’s ambitions, though, are likely to attract renewed scrutiny. Regulators in the US and elsewhere have been asking tough questions about the ownership and stability of acquisitive Chinese companies. Some lawmakers and White House officials support broadening the authority of regulators who review takeover offers.

“Anyone who knows anything about China knows the nature of the party and state and the opacity of company ownership,” said Fraser Howie, a former banker in Asia and a co-writer of three books on the Chinese financial system. “There was never any excuse for not asking the difficult questions. A lot of foreign regulators just skipped over them and were far too relaxed in their approach.”

More than $4 billion worth of deals by Dalian Wanda, HNA and Fosun, including some in China, await approval, according to Dealogic, a data provider.

It is not clear what will happen to Anbang’s overseas properties, including the Waldorf Astoria, which is undergoing an expensive renovation. Anbang spent $15 billion on high-profile overseas deals from 2009 to 2017, according to Dealogic. The acquisitions included well-known hotels in London, Manhattan, Mexico and Paris; insurance companies in South Korea and the Netherlands; and even a stake in Woori Bank, once among South Korea’s largest lenders.

One of the companies snapped up in the spree is Vivat, a Dutch insurer that Anbang bought from the Dutch government for €150 million (Dh677 million) in 2015. As part of the deal, Anbang pledged to pump up to €1 billion into Vivat and to take on €552 million of debt, a move hailed by Chinese media at the time as a heroic step toward bringing the insurer back from the brink of bankruptcy. The fate of that effort is now uncertain.

A Vivat spokeswoman said that “as for now”, the government takeover of Anbang would “not affect Vivat or its clients”. She added that the insurer was subject to Dutch laws and regulations and monitored by Dutch supervisory authorities.

— New York Times News Service