China's leaders are often praised for their steady management of the economy. But this week it became clearer than ever that they are haunted by the specter of a Lehman-style collapse.
On Thursday, we learned from a flurry of reports (including in the Wall Street Journal, Financial Times and Bloomberg) that the China Banking Regulatory Commission has ordered the nation's largest lenders to conduct a sweeping reassessment of their exposure to four high-flying financial conglomerates: Anbang Insurance Group, HNA Group, Fosun International and Dalian Wanda Group.
The focus of the reviews, according to the reports, is to determine whether debts held by the four firms pose a "systemic risk" to China's financial system. News of the probes sent a chill through markets.
The composition of the CBRC's corporate "Gang of Four" speaks volumes. The companies are among China’s most flamboyant overseas acquirers. Together they have purchased nearly $57 billion worth of foreign assets over the past five years, more than 15% of total overseas investments by Chinese firms, according to Dealogic.
Anbang (whose chairman mysteriously disappeared this month and is presumed in the custody of Chinese graft inspectors) swallowed the Waldorf Astoria. HNA secured a 10% stake in Deutsche Bank and and a 25% stake in the Hilton Hotel Group. Dalian Wanda Group snapped up AMC Entertainment Holdings, the world’s largest cinema operator, then bought Hollywood's Legendary Entertainment for $2.6 billion. Fosun owns Club Mediterranee and Cirque du Soleil.
The four conglomerates originated in different sectors, but their underlying business model is the same: cultivate powerful allies in the Communist Party; use those relationships to win regulatory and property concessions; gather investment from friends, family and other proxies of party elites into a murky, unregulated private holding company; borrow heavily from state-owed banks and other sources to finance prodigious growth plans; invest as aggressively as possible in stock and property overseas as a hedge against slower growth in China and the risk of a weaker Chinese currency.
The model afforded founders and their privileged backers an efficient way to exploit contradictions in China's capital control policies. Beijing remains unwilling to let the renminbi trade freely on global currency markets. At the same time, though, party leaders have declared that Chinese companies must "go global" and compete with Western multinationals.
For the past decade, large corporations like Anbang, HNA, Fosun and Wanda were permitted—and even encouraged—to invest billions overseas. As long as they stayed in the good graces of the party elite and could plausibly portray their investments as being in the national interest, regulators mostly turned a blind eye to who owned what, what they were buying and how they were funding their expansion.
No more. As China's growth show signs of cooling and the Communist Party prepares for its all-important 19th Congress, a cadre of reformers led by CBRC chairman Guo Shuqing is warning that these swashbuckling global buyers aren't national champions but lightning rods for financial risk.
In April, Beijing finally moved to clean up the cowboy culture of China's insurance industry, sacking the nation's top insurance regulator and restricting the ability of insurers like Anbang and Fosun to finance speculative global acquisitions by selling short-term, high-yield universal life insurance products at home.
But regulators have been slower to deal with soaring corporate debts levels. The Gang of Four is highly leveraged. The fact that their parent companies are unlisted means they have few disclosure requirements. But it also means they face higher borrowing costs. Many have put up their own shares or stock of companies they own as collateral for their loans and are increasingly copying the convoluted fund-raising strategies employed by American hedge funds and private equity firms in financing their global expansion drives. Should the value of those stocks fall, the companies could find themselves obliged to sell off shares to meet margin calls.
Containing the contagion could prove a tricky business. Here's hoping that in trying to head off China's Lehman moment, China's policymakers don't hasten its arrival.
Finance and investment
Chinese capital controls squeeze $100 billion city next to Singapore. China is tightening restrictions on overseas investments by individuals as well as companies. Bloomberg reports that stricter capital controls have cast a shadow over the future of Forest City, a sprawling a Malaysian version of Shenzhen being developed by China's Country Garden Holdings Co. The development, which has been marketed almost exclusively to mainland Chinese, envisions hotels, offices, golf courses, tech parks and thousands of ritzy new apartments. But a December announcement by the Chinese government that all buyers of foreign exchange must sign a pledge that they won’t use their $50,000 exchange quotas to purchase offshore property investment has spooked potential buyers. Bloomberg
Beefing up US-China trade ties. China received its first shipments of American beef in on Friday, after the two nations agreed to lift a 13-year ban on the trade in May. Chinese importers are racing to bring in American beef to feed growing demand for premium meat in the $2.6 billion beef import market. The import permit was granted under the Sino-US 100-day action plan that has helped to reduce economic friction between Washington and Beijing, the two nations appear to have reached a stalemate over North Korea. Wall Street Journal
U.S. weighs new restrictions on Chinese technology investments. The United States is preparing to heighten scrutiny of Chinese investment in Silicon Valley, current and former U.S. officials tell Reuters. Among the measures under consideration are restrictions on China's investment in fields such as artificial intelligence and machine learning. U.S. officials worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and perhaps even push it ahead in strategic industries. Reuters
MSCI includes China shares in emerging markets index. The MSCI announced Wednesday that it will add Chinese mainland equities, or A-shares, into its Emerging Markets Index, tracked by around $1.6 trillion in assets. The decision lifted Chinese stocks to an 18-month high, as many read the MSCI’s endorsement of China’s domestic markets as an indicator of the healthy progress the country is making on market access and governance. But minefields still abound for international investors used to conventional market efficiencies: daily trading limits, tough capital controls, frequent trading halts and over-inflated valuations still dog China’s $6.9 trillion mainland market, says Bloomberg, calling it “a jungle out there”. The New York-based index compiler rejected China three times before agreeing to admit 222 mostly big-cap stocks to make up 0.73 per cent of its flagship index. Bloomberg
Tesla to produce Model 3 cars in China. Tesla has inked an agreement with the city of Shanghai to build its next Gigafactory on the outskirts of the Chinese metropolis, according to Bloomberg. Production of the Model 3, the cheapest model in Tesla’s lineup, is expected to begin in July. Tesla's Model S and Model X EVs currently ship to Chinese buyers with a 25% import tax. CEO Elon Musk gained a valuable Chinese ally for its China expansion plans in March, when the Internet giant Tencent coughed up $1.78 billion for a 5% stake in the US electric car maker with lofty ambitions. Business Insider
Ford takes flak for swapping Mexico factory for one in China. U.S. Trade Representative Robert Lighthizer decried Ford's decision to move production of its Ford Focus small cars to China and import the vehicles to the US. Ford said the move is “purely financial” and will save the company $500 million. New York Times
Technology and innovation
China’s booming bike-sharing market claims its first casualty. Chongqing-based Wukong Bikes went bust earlier this week, after 90 per cent of its 1,200 fleet of bicycles were either lost or stolen. The 5-month old start-up was launched after just 20 days of development by Dalian University dropout Lei Hou Yi, who estimated losses of 3 million yuan from Wukong’s closure. Lei said the business failed as they neglected to install GPS systems on its bikes like deeper-pocketed rivals Mobike and Ofo did. By the time it realised the technology was necessary, they had run out of resources. Wukong’s shuttering comes shortly after Mobike gained over $600 million in its latest funding round last week. BBC
China ramps up 5G network investment. China is planning to spend a further US$411 billion between 2020 and 2030 to build out its 5G mobile network, according to a government research paper. China already is the world’s largest mobile market and 4G market. The country’s 5G subscriber count is expected to reach 588 million by 2022 - making it the biggest 5G market by subscribers in the next decade. The latest advancement in mobile tech, 5G networks can cater to 1 million connected devices per square kilometre, and support applications like augmented and virtual reality entertainment as well as large-scale implementation of so-called internet of things devices. South China Morning Post
China tightens grip on video-streaming websites. After shuttering over 60 of the country's biggest online gossip channels last week, Chinese authorities are now sending the same “clean up or close down” warning to popular video-streaming websites. Regulators ordered Twitter-like social media channel Weibo and two other video platforms, ACUN and iFeng, to immediately stop broadcasting unlicensed video and audio content as they “comment on current affairs and spread negative comments.” The news wiped 6.1 per cent off Weibo’s Nasdaq-listed shares in intraday trading on Thursday. But the effectiveness of the clampdown isn't clear. Weibo said in a statement that the ban only affected media outlets without licences, and individuals could still post their own videos. Weibo hosts its video content exclusively on Miaopai and Yizhibo, both platforms owned by Yixia Technology, a parent company with the required license. Investors Business Daily
JD.com invests in UK luxury retailer Farfetch. China’s second largest e-commerce company after Alibaba has signed a $397m partnership with London-based retailer Farfetch. JD’s stake in Farfetch will let the Chinese e-commerce platform bank on the established reputations and existing distribution relationships that Farfetch has with luxury houses and Chinese consumers who are hesitant about transacting on the proliferation of fake goods on local Chinese marketplaces like Tmall and JD.com. In return, Farfetch gets to tap JD.com’s China logistics network, including its premium white-glove courier service, JD Luxury Express. Tech Crunch
Jack Ma woos American companies in Detroit. Even smaller companies have a shot at doing business in China, says Jack Ma. Speaking to thousands of US business owners and entrepreneurs at Alibaba's Gateway '17 event in Detroit this week on how they could use Alibaba to access the China market, the Alibaba founder urged small businesses to think about competing globally by integrating e-commerce services and online and mobile components into their business. The two-day event was organized to fulfill a promise Ma made to President Trump earlier this year to create one million jobs in the US. Inc.
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China in the World
U.S. steps up pressure on China to keep North Korea in check. The United States continues to press on China to exert more economic and diplomatic pressure on North Korea. Top U.S. and Chinese diplomats and defense chiefs met in Washington on Wednesday, a day after President Donald Trump tweeted that China's efforts to use its leverage with Pyongyang were in vein. Defense Secretary Jim Mattis continues to assert that China has “a diplomatic responsibility” to exert much greater economic and diplomatic pressure on the North Korean regime, and that the US would continue to take “necessary measures to defend ourselves and our allies”. Reuters
Meanwhile in Hong Kong...
Pony Ma envisions a Chinese Silicon Valley. Chinese billionaire and Tencent founder Pony Ma has renewed calls for the Chinese government to nurture a Silicon Valley-like haven for technology and innovation in the Greater Bay Area of Hong Kong, Macau and Guangzhou - the latter the homebase of Tencent. He outlined his vision at a summit he convened of mainland government officials and investors alongside some of the Hong Kong property tycoons in Hong Kong this week. While the vision isn’t new - Ma first mooted the idea in Beijing in March - observers were quick to zero in on the timing of his summit: the famously media-shy entrepreneur treads onto contentious political ground by holding it just days before the 20th anniversary of Hong Kong’s return to China. Bloomberg
Li Ka-shing announces retirement and successor. Hong Kong-based Li Ka-shing, one of the world’s biggest tycoons, has said that he plans to retire as early as next year. The 88-year-old year old has named the elder of his twin sons, Victor Li, as his successor in principle, although his empire will be split equally between them. Victor will take the helm of property group Cheung Kong (Holdings) and conglomerate Hutchison Whampoa, now named CK Hutchison and Cheung Kong Property Holdings while younger son Richard controls PCCW, the media and information technology services giant, and “there will be no conflict among their businesses”, said the elder Li. South China Morning Post