Deals

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Xi Jinping doesn't want to be condemned to repeat history, so he's learning from it.

The top economic adviser to China's president commissioned a study on Japan's 1980s bubble economy -- a topic that came up for a Politburo discussion in April. Soon enough, Xi was pulling the plug on his nation's most acquisitive buyers of foreign assets, Bloomberg News reported on Thursday, suggesting that the People's Republic's fear of becoming another Japan may be driving the clampdown.

The similarity between Japan Inc.'s scooping up of trophy assets like the Rockefeller Center and Columbia Pictures back then, and Anbang Insurance Group Co.'s purchase of the Waldorf Astoria -- or Dalian Wanda Group Co.'s takeover of Legendary Entertainment LLC -- is obvious. What's less apparent is Xi's endgame. Is the crackdown involving Anbang, Wanda, HNA Group Co., Fosun International Ltd. and Rossoneri Sport Investment Lux, the Chinese owner of Italian soccer team AC Milan, a blanket ban on headline-grabbing outbound Chinese M&A? When will Beijing ease up again?

Lesson From Japan
The yen's surge following the 1985 Plaza accord triggered a short-lived offshore acquisition spree by Japan Inc.; China's crackdown on overseas investment is a way to prolong the party
Source: Bank for International Settlements
* Currency values adjusted for inflation at home and abroad.

Those answers also lie in history. Investors need to watch three things: the yuan exchange rate; the relative ease with which Chinese companies can raise domestic bank finance to make international purchases; and whether the mainland's property market is at risk of keeling over.

This 1-2-3 checklist is Japan-inspired. An overvalued yen, which made global assets appear cheap to Japanese companies, sent them on an investment spree in the 1980s. This corporate wealth effect is also a problem in China where the 53 percent appreciation in the yuan in inflation-adjusted terms in the 10 years through 2015 is comparable to the yen's 44 percent climb in the three years following the 1985 Plaza Accord. (Beijing has managed to reverse only 9 percent of that surge.)

However, the yen also soared 30 percent in real terms in the first half of the 1990s, and the share of Japanese outbound M&A in the U.S. slumped to 1 percent in 1998 from a peak of 30 percent in 1990. This anomaly, according to economist Michael Klein and others, was because of choked credit pipes. The bursting of the 1980s bubble economy was such a blow for banks that they were in no position to offer loans to the same large borrowers with whom they had cozy relationships.

Promise You'll Lend Me a Dime
Chinese companies borrowed $37 billion overseas under third-party guarantees last year for acquisitions
Source: Bloomberg

Beijing is watchful. The State Administration of Foreign Exchange says it'll work with other regulators to ensure lenders and borrowers aren't abusing the popular financing channel of Overseas Loans Under Domestic Guarantee. To see why Xi has identified collateral as a problem area, consider this: Offshore units of Chinese companies borrowed $37 billion under third-party guarantees (often given by the parent) in 2016 for acquisitions, a sevenfold jump versus the previous year, according to data compiled by Bloomberg.

Ultimately, China's real-estate market will determine if the collateral that Chinese companies are posting will hold its value. Japan's buyout of America ended when its banks got into trouble following the collapse of Tokyo's property bubble.

Until Xi can guarantee a soft landing for the bloated property sector, he can't afford to let local companies shop till they drop. The endgame is to prolong a party that ended only too soon for Japan.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net