Why China Is Scrutinizing Its Biggest Dealmakers: QuickTake Q&ABy
Why China Is Scrutinizing Its Biggest Dealmakers: QuickTake Q&ABy
China Inc. went on an unprecedented shopping spree in 2016, buying up $245 billion of overseas companies in a binge that was spearheaded by giant private conglomerates. But many of those same companies have come under official scrutiny this year by a government concerned about risks to the financial system. Among them are Dalian Wanda Group Co., Anbang Insurance Group Co., HNA Group Co. and Fosun International Ltd. The latest firm that may feel the heat: Sunac China Holdings Ltd.
1. Why is China’s government taking such an interest?
Authorities got spooked by the amount of leverage Chinese companies deployed to back those overseas deals. In addition, the country has been trying -- with some success -- to stem capital outflows that were putting pressure on the Chinese currency. 2017 is also a politically sensitive year, with a twice-a-decade Communist Party congress taking place in October. Officials are stepping up checks on conglomerates to avoid the possibility of deals going bad in the run-up to a meeting that will shape the leadership of the party in the next decade. While de-risking has been the government’s mantra since 2015 -- when whiplash moves in Chinese shares ignited global turmoil -- the nation’s most powerful politicians are now weighing in. In April, President Xi Jinping chaired a gathering to discuss “safeguarding national financial-market security.”
2. What steps have the authorities taken so far?
Officials choked off a boom in outbound mergers and acquisitions in the first half of 2017. They laid down explicit rules restricting overseas investments in August, stepping up a campaign against “irrational” acquisitions of assets in industries ranging from real estate to hotels and entertainment. Still, China encouraged companies to make investments in areas including those related to the government’s “One Belt, One Road” campaign. As a result, July to September is on course to be the third-highest quarter for Chinese overseas acquisitions.
3. So it’s the ambitious private companies under scrutiny?
Exactly. Wanda Group, Anbang, HNA and Fosun have gobbled up stakes in everything from “Kong: Skull Island” producer Legendary Entertainment to New York’s landmark Waldorf Astoria hotel, Deutsche Bank AG and Cirque du Soleil Inc. Combined, they announced more than $60 billion in deals since the start of 2016. The China Banking Regulatory Commission stepped up scrutiny of those companies, plus the Chinese buyer of the AC Milan soccer club, asking for data on loans related to the companies’ overseas investments, especially in property, cinemas, hotels, entertainment businesses and sports clubs, Bloomberg reported in June.
4. What exactly happened to Sunac?
That’s in dispute, but Bloomberg reported that a state-owned asset company temporarily suspended new project loans to the property developer, according to an internal email seen by Bloomberg. The company, Huarong Asset Management Co., says it’s not acting on instructions from regulators, but the email noted authorities are paying more attention to Sunac’s high debt load and aggressive acquisitions strategy. Sunac denied Bloomberg’s report, saying cooperation with Huarong remains normal. Sunac’s profile was raised in July when it paid Wanda more than $6.5 billion for theme parks and other assets. Sunac shares are up more than fivefold this year, but analysts have expressed concern at the firm’s leverage levels. In a social media post in July, billionaire Chairman Sun Hongbin pledged to tame debt and guard cash flow.
5. What’s happening with HNA?
HNA has become the biggest shareholder of Hilton Worldwide Holdings Inc. and Deutsche Bank. Led by Chairman Chen Feng, the once-obscure company has announced more than $40 billion in asset purchases from the start of last year. The company also found itself in the news because of questions about its true ownership, and when Guo Wengui, a fugitive tycoon sought by Chinese authorities, made allegations of secret ties to Communist Party officials. HNA denied those claims and sued Guo in New York for libel.
6. What about Anbang?
Started in 2004 as an auto, property and casualty insurer, Anbang and its chairman, Wu Xiaohui, shot to international fame with the acquisition of New York’s Waldorf Astoria in 2014. That kicked off a three-year takeover spree that saw the firm notch more than $10 billion in foreign acquisitions. The company fueled its growth by selling short-term insurance policies with high returns. Now, it’s preparing more traditional products, according to people familiar with the matter. Detained by investigators, Wu has faced questions in a probe that includes looking into the sources of funding for Anbang’s overseas acquisitions, possible market manipulation and “economic crimes,” people familiar with the matter have said. The investigation doesn’t mean Wu is accused of any crime or will face charges, the people said. The company has confirmed he isn’t carrying out his duties, for “personal reasons."
7. What about Wanda?
Led by billionaire Wang Jianlin, one of China’s richest men, Wanda is a real-estate group that sought to transform itself into a entertainment giant that would challenge Walt Disney Co. Lately, however, the focus has been more on the group’s disposals than its ambitions. Wanda sold off hotels and theme-park assets, while also scrapping plans to buy a plot of land in central London. Wang’s group owns AMC Entertainment Holdings Inc. and is the world’s largest operator of movie theaters. Wanda also owns Hollywood producer Legendary Entertainment.
8. And Fosun?
Like Anbang, Fosun has used money raised selling insurance to pursue deals -- a la Warren Buffett’s Berkshire Hathaway Inc. In the 25 years since its founding, Fosun has transformed into a sprawling empire with assets ranging from Cirque du Soleil and Club Med to the 28 Liberty building near Wall Street in New York. In 2015, Chairman Guo Guangchang briefly disappeared to help with a government investigation. The intrigue triggered a rout of Fosun-related securities. He later re-emerged, vowing to ensure the business was not reliant on any one individual.
The Reference Shelf:
- A Bloomberg graphic tracking China’s outbound M&As.
- A QuickTake Q&A on Anbang.
- A QuickTake explainer on China’s efforts to protect its currency.
- New York Times stories related to HNA.
— With assistance by Prudence Ho, Jing Yang de Morel, and Ben Scent