The New York Times reports that cash-strapped Chinese aviation and shipping conglomerate HNA Group is appealing to its own employees for financial assistance to cope with the estimated $90 billion in debt the group rang up in its high-profile global spending spree. In January, according to the Times, HNA Group companies bombarded employees with a variety of e-mail pitches promising high rates of interest in exchange for short-term loans. The Times says it reviewed “dozens” of different offerings. One touted 8.5% for workers lending $1,500. Another proffered a return of up to 40% to employees willing to lend $15,000.
An HNA lawyer said the offers were part of an incentive program for employees and not intended to provide financing for the conglomerate. But none of the appeals appear to have offered employees equity in HNA companies. Anne Stevenson-Yang, co-founder of J Capital Research, called the employee appeals a “desperation measure when companies really have no other source of financing and they are stuck.”
Until recently, HNA, headquartered on China’s southern Hainan Island, was among the Middle Kingdom’s brashest overseas investors. Its global acquisitions included Minnesota-based Carlson Hotels, owner of the Radisson and Park Plaza Hotels; a 25% stake in Hilton Worldwide Holdings; a 9.9% stake in Deutsche Bank; the aircraft leasing arm of the New York financial firm CIT Group; and Ingram Micro, the Irvine-based company that is the world’s largest distributor of technology products. In January 2017, HNA Capital, one of the group’s subsidiaries, pledged $200 million for a majority stake in SkyBridge Capital, the New York hedge fund of Anthony Scaramucci, facilitating Scaramucci’s colorful, albeit brief, stint as an official in the Trump White House.
HNA’s buying binge came to an abrupt halt last summer after the Chinese government identified overseas investments by HNA and several other Chinese companies as posing a systemic risk to China’s economy. An unsigned commentary in the Peoples’ Daily, borrowing from metaphors popularized by Nassim Nicholas Taleb and American policy analyst Michele Wucker, argued that China’s acquisitive conglomerates weren’t “black swans” (high-impact risks that are highly improbable and therefore almost impossible to predict) but “gray rhinos”—high-impact risks that were highly probable but widely ignored. China’s giant state-owned banks, the major source of the conglomerates’ funding, began reining in lines of credit.
Over the past two months, HNA has shown signs of severe financial distress. The group, which ranked 170 on last year’s Fortune Global 500 list, has total assets of about $180 billion, and generates substantial operating income. But it is clearly struggling keep ahead of creditors. The Financial Times reports that $20 billion in dollar-denominated bonds issued by HNA and its subsidiaries are due to mature in 2018 or 2019; yields on three of those bonds have spiked, doubling this month to more than 18%. In December, the group borrowed against its Hilton shares three different times to increase capital, according to the Wall Street Journal. Bloomberg says HNA group has been trying to sell assets including property in Sydney and Hong Kong. A Chinese bank sought to freeze HNA assets after discovering that the company used the same shares as collateral for multiple loans. Since November, seven of HNA Group’s 16 listed subsidiaries have suspended trading of their shares on exchanges in Shenzhen and Shanghai pending major announcements.
In a January interview with Reuters, HNA Group chairman Chen Feng expressed confidence HNA will “move past these difficulties and maintain sustained, healthy and stable development.” Perhaps. For now, though, nursing this wounded rhino back to strength looks like a daunting and perilous task.
More China news below.
Technology and Innovation
Ant’s nest. Alibaba has taken a 33% stake in financial affiliate Ant Financial, which operates popular online payment platform Alipay. Alibaba will acquire the newly-issued shares from Ant Financial in exchange for certain intellectual property rights, putting an end to the profit-sharing arrangement in place since the company was spun off in 2014. The current 76.4% stake owned by Alibaba management and employees and 23.6% by domestic China investors will drop to 51.2 and 15.8% respectively under the new structure. Ant may also be hoping that partial ownership by US-listed Alibaba will make it easier to make US acquisitions, such as their previously quashed bid for MoneyGram. Financial Times
Credit cut. Tencent has pulled its credit-scoring system a day after its launch on Tuesday, after China’s central bank credit bureau expressed its concerns over misuse of users’ personal credit information. The service assigns a score to Chinese nationals who use Tencent’s social media apps WeChat or QQ based on transaction data on their mobile transactions and social networks. Archrival Alibaba was the first in China to pilot their Sesame Credit in 2015, was similarly reprimanded by the regulators in January for automatically enrolling users in its credit scoring program. Caixin
Uber wants in. Uber has launched its own dock-less bike-sharing service, akin to the ones Chinese players Mobike and Ofo have rolled out in China and beyond. Uber is piloting the scheme among a select group of users in San Francisco in partnership with Jump Bikes, which runs electric bike-share schemes around the U.S., Uber said in a blog post this week. Quartz
Big dreams for Xiaomi. Chinese phone maker Xiaomi is planning an IPO in Hong Kong, under the territory’s reformed rules allowing companies to issue a two-tiered share structure with different voting rights. The listing will likely take place in September, when the reforms are in place, and Xiaomi would like to be the first company to list under the new IPO rules, according to a source. South China Morning Post
Search me. Beijing’s Bytedance Telecommunications Co., who runs news aggregator app Toutiao, is suing China’s largest search engine Baidu for unfair competition. Bytedance claims that Baidu deliberately places negative news about Toutiao in top search results. Sixth Tone
Trade and Economy
Go East. Sequoia Capital, an early investor in Google and Apply, is looking to tap on Chinese investors, including state-owned funds, to raise another $8 billion, its largest fundraising round to date. The cash will be used to diversify Sequioa’s focus from early-and growth-stage investments to pre-IPO funding rounds, observes said. Reuters
Dead ringer. Verizon is the latest telecommunications carrier to cancel its plans to sell phones by Chinese smartphone maker Huawei in the U.S., due to pressure from the Trump administration. The rejection comes a month after AT&T backed out of a similar deal. The Verge
Wanda’s woes. To hold off a pending liquidity crisis, Wanda this week divested a 14% stake in its commercial properties arm. Week in China looks at why Chinese behemoths including internet giant Tencent as well as retailers JD.com and Suning would have an interest in their shares, and what their coming on board spells for the era of ‘New Retail’ in China. Week in China
In Case You Missed It
It is easier to get into Goldman Sachs than be hired for this job at Chinese e-commerce giant South China Morning Post
Chinese Firm Announces U.S. Solar Plant, a Week After Trump Tariffs Wall Street Journal
Politics and Policy
Be that as it may. Despite meeting with President Xi Jinping in Beijing this week, U.K. prime minister Theresa May will not give written support for China’s ambitious Belt and Road project, due to concerns that contracts under the scheme will unfairly favour Chinese companies. Chinese state media also praised May for her wisdom and pragmatism in sidestepping calls to challenge Beijing over issues of human rights and Hong Kong’s sovereignty. Financial Times
Wang’s still wanted. President Xi Jinping is likely to appoint trusted aide Wang Qishan to manage the country’s increasingly tense relations with the U.S. over trade. Wang, who ran Xi’s anti-corruption campaign, stepped down from top leadership in October upon hitting retirement age, but is being considered by Xi for several roles, including state vice president. Wall Street Journal
Rats and cats. China’s financial system is plagued by unlicensed financial activity and illegal fundraising, thanks to a system of corrupt regulators colluding with wrongdoers, said Xu Jia’ai, the newly appointed head of discipline at China’s central bank, this week. South China Morning Post
Roots to China. China’s Ministry of Public Security will offer long-term resident visas of up to five years for foreigners of ethnic Chinese descent to encourage them to visit family or conduct business in China. Applicants need to prove that they are the offspring of present or former Chinese citizens, and there is no limit to the number of generations in between the applicant and his ancestor. South China Morning Post