Xi's Jinping sign-off deals blow to China Inc's global spending spree

Measure is a warning to China's other big private biz that loaded up on debt to buy assets overseas

China’s government reined in one of its brashest conglomerates with the approval of President Xi Jinping, according to people with knowledge of the action—a mark that the broader government clampdown on large private companies comes right from the top of China’s leadership.

The measures, with President Xi’s previously unreported approval last month, bar state-owned banks from making new loans to property giant Dalian Wanda Group to help fuel its foreign expansion.

The cutoff in bank financing for the company’s foreign investments highlights Beijing’s changing view of a series of Wanda’s recent overseas acquisitions as irrational and overpriced, these people say.

Targeted along with Wanda are HNA Group Co., Anbang Insurance Group and Fosun International Ltd. 0656 0.51% —which had reputations for well-cultivated political ties.

“It feels like an avalanche,” said Jingzhou Tao, a lawyer at Dechert LLP in Beijing, who does mergers and acquisitions work. “This is sending a shock wave through the business community.”

Since 2015, the four companies completed a combined $55 billion in overseas acquisitions—or 18% of Chinese companies’ total. In recent days, Wanda’s billionaire founder Wang Jianlin has been shrinking his empire by selling off assets and paying back the company’s bank loans.

Beijing for years encouraged Chinese companies to scour the globe for deals. Now it is reining in some of its highest-profile private entrepreneurs in what officials say is growing unease with their high leverage and growing influence. The measures serve as a stern warning for other big companies that loaded up on debt to buy overseas assets, officials and analysts say.

Mr. Xi acted after China’s cabinet set the government machinery in gear by directing financial regulators, the economic planning agency and other bureaucracies to take a hard look at foreign acquisitions, once seen as a means for China to showcase its economic might, these people said.

Chinese banking regulators last month ordered banks to scrutinize loans to Anbang and other highfliers including airlines-and-hotels conglomerate HNA Group, which has pulled back on overseas investments.

Officials at Wanda and at Anbang declined to comment. HNA said in a statement it continues to take a “disciplined approach” to identifying “strategic acquisitions across our core areas of focus.”

Officials at Fosun said the firm has “overseas funds and other stable financing channels,” including a fund of around U.S. $1 billion to invest, but emphasized it “fully respects the government regulations both in China and overseas markets.” Fosun has a listed unit in Hong Kong, and its strategy to invest in health care and technology “adheres to China’s global investment strategy,” said a spokesman, Chen Bo.

Going forward, some believe China’s private companies will have trouble getting capital, which would help shift financial clout further in favor of big state-owned enterprises.

Beijing’s sterner line comes as big private businesses and others have been amassing capital and influence that challenge the authoritarian Chinese leadership’s firm hold on the economy.

Its grip has been tested over a bumpy few years. After a 2015 stock market meltdown and a botched government rescue, a gush of money flowed out of the country looking for better returns. That in turn put pressure on China’s tightly controlled yuan and foreign-exchange reserves, both seen by Beijing as barometers of confidence in the economy.

The latest scrutiny is a watershed moment in the Communist government’s relations with a private sector it has never been comfortable with. Though some senior leaders, particularly Premier Li Keqiang, are urging a new culture of startups and small businesses, Mr. Xi has promoted plans to make already-large state enterprises larger and strengthen their sway over the economy.

Chinese firms completed $187 billion in outbound deals last year, according to Dealogic, as private companies snapped up trophy properties, soccer clubs and hotels, while Chinese with means bought homes and pushed up real-estate prices from Texas to Sydney.

The private sector’s share of overseas spending shot up from barely above zero about a decade ago to nearly half of China’s total overseas investments in 2016, before slipping back to 36.9% in the first half of 2017, according to Derek Scissors, a China expert at the American Enterprise Institute.

Amid the rush of investments, Beijing burned through nearly a trillion dollars in foreign-exchange reserves trying to steady the yuan. That ultimately led government regulators to clamp controls on money exiting the country and to scrutinize all proposed major offshore investments.

“Those companies have borrowed a lot to fund their deals overseas, and that means risks to Chinese banks if the deals go bad,” a Chinese official involved in policy-making said.

The official said China is acutely aware that as Japan rose to economic prominence in the 1980s, its companies splurged on American real estate and other trophy assets, resulting in losses that cascaded through Japan’s banking sector.

Mr. Tao, the Beijing lawyer, says the government’s new aggressive posture is driven in large measure by a need for control. “State-owned assets, whether in China or abroad, are still state assets,” he said. “But when private entrepreneurs take their money out, it’s gone. It’s no longer something that China can benefit from or the Chinese government can get a handle on.”

Not all cross-border investment is out of favor. Beijing wants companies to support initiatives such as Mr. Xi’s signature “One Belt, One Road” initiative, which is intended to draw China’s neighbors into Beijing’s economic orbit through transit hubs and industrial parks. Investments are being approved for industrial robots and other advanced technology to facilitate the country’s ambition to move up the value chain.

An early sign of government discomfort with overseas spending was Anbang’s unsuccessful $14 billion bid for Starwood Hotels & Resorts Worldwide Inc. in 2016. Authorities expressed displeasure with the bold move, believing that Anbang had offered too much, according to a person with knowledge of the situation.

Anbang, which had appeared unstoppable in 2014 when it struck a $2 billion deal to buy the U.S. Waldorf Astoria hotel, fell deeper in trouble. This past June, special government investigators looking into economic crimes detained Anbang’s chairman, Wu Xiaohui, who hasn’t appeared in public since.

In the case of Wanda, regulators acted in the belief the company overpaid in efforts to expand beyond shopping centers and hotels and into entertainment, according to the people with knowledge of the action.

Its largest such acquisition was of Legendary Entertainment, the Hollywood producer and financier behind films including “Jurassic World” and “The Dark Knight.” Wanda spent $3.5 billion to buy Legendary in 2016; In Hollywood, industry insiders widely believed the company paid too much. Legendary said this week that it is well-capitalized, operating normally and able to fund its film and television productions.

 

The Wall Street of Journal