HNA-Like Debt Pileups Raise Risk of Forced Asset Sales in ChinaBy
Other big borrowers may also need to start unloading assets
The pressure to slash debt is coming from Xi’s government
China’s biggest dealmakers are in a new race to shed assets, and ballooning debt levels may force other firms to follow.
Indebted conglomerate HNA Group Co., which has already announced sales of an Australian office building and a stake in a U.S. shipping company, is said to be trying to sell about 100 billion yuan ($16 billion) in assets by the middle of the year.
Meanwhile, Dalian Wanda Group Co. has agreed to sell two Australian real-estate projects and is said to be seeking buyers for properties in Chicago and Beverly Hills. And China’s government is said to be seeking to orchestrate the sale of a stake in Anbang Insurance Group, a conglomerate that agreed to pay $1.95 billion for the Waldorf Astoria hotel in 2014.
Mounting difficulties with financing aren’t unique to these big, private-sector companies. Behind the high-profile groups that command the headlines are many other Chinese companies that are feeling squeezed as the government intensifies its campaign against excessive debt. That could set the stage for fire sales of Chinese assets.
“There is a tightening noose on a lot of companies to control their debt and force them into deleveraging mode,” said Christopher Lee, credit analyst with S&P Global Ratings. “We should expect some of the weaker companies to run into distress.”
The pressure to slash debt is coming from the top, with President Xi Jinping and his advisers having vowed to reduce the risk of financial instability. The effort is one of the country’s “critical battles,” according to a statement released by the official Xinhua news agency in December.
Corporate debt, which was 100 percent of GDP a decade ago, hit 159 percent in 2016, according to the most recent data compiled by Bloomberg.
This was supposed to be the year when Chinese companies caught a break, with the amount of local bonds coming due dropping to the least since 2014. But the outlook is no longer so clear cut. That’s because of so-called put options, which give noteholders the right to demand repayment even though the securities don’t mature until later years.
Interest rates in China are rising, making it more likely that investors will do just that -- using the funds to buy recently issued bonds with higher returns. There’s a record 1.25 trillion yuan of notes that could be put in 2018, more than three times last year, according to data compiled by Tianfeng Securities Co.
Pressure from financial markets along with government imposed restrictions on funding have increased the likelihood that Chinese companies will try to unload assets. China’s shadow-banking industry -- an off-balance-sheet network of banks, trust companies and private lenders -- has recently been the target of a renewed government crackdown.
“How many guys are there like HNA? I think there are many others,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets Hong Kong Ltd.
That is putting would-be sellers at a big disadvantage. The more cases there are of high-profile Chinese companies unloading assets, the more difficult it becomes for others that need to sell too, according to Rajiv Biswas, chief economist for Asia-Pacific with IHS Markit in Singapore.
“Normally with these transactions you need time,” said Biswas. “If you suddenly have to do it because the government told you to, everyone will jump on it and push down your price.”
Even state-owned enterprises are unlikely to be immune, although attacking debt in this particularly powerful sector is more difficult than pressuring private companies like HNA. Government entities and state-backed firms have at least 20 trillion yuan of outstanding bonds alone, according to data compiled by Bloomberg.
“The big problem is still with the state-owned enterprises,” said Fielding Chen, a Bloomberg Intelligence economist in Hong Kong.
Adding to concern about local borrowers’ ability to make repayments, a record amount of notes come due this year. A default by a state-owned company in Yunnan province in January increased the risks of holding corporate debt.
“We expect SOEs to deleverage over the next two to three years,” said Lee. “Everybody has to do it.”
While HNA faces pressure to find buyers fast, the relative strength of the Chinese economy should help many other companies avoid fire sales, said Chua Han Teng, head of Asia country risk and financial markets for BMI Research in Singapore.
“Yes, the corporate debt level is high but the Chinese economy improved over the course of 2017 and therefore the ability of Chinese SOEs to meet their debt has also improved,” said Chua.
Some leading private-sector companies have resources to help. Wanda received a boost in January when it announced that a consortium including internet giant Tencent Holdings Ltd. and e-commerce provider JD.com Inc. would buy 14 percent of Wanda Commercial Properties Co. for 34 billion yuan.
And even vulnerable private-sector companies like Wanda have some advantages, according to BMI’s Chua.
“They are sort of brand names for China, so if they are able to ride through this difficult period, I think they will be able to continue their operations in China, although at a much lower size,” he said.