Anbang Nationalisation Underlines China’s Financial Stability Priority

WU XIAOHUI, THE politically well-connected chairman of the giant insurance group Anbang (his wife is Deng Xiaoping’s grand-daughter), has been in detention by authorities since last June. Now he is to stand trial for economic crimes, code for fraud and embezzlement, and the company run by personnel from the China Insurance Regulatory Commission for a year or two, an extraordinary move. The state assuming control of a private-sector business, and particularly one of this size and prominence, is unusual.

Anbang has been on an aggressive international acquisitions drive, buying such foreign trophy investments as the Waldorf Astoria in New York and a string of other luxury US hotels. Chinese firms, with official encouragement, have ‘gone global’ in recent years, rapidly expanding their international mergers and acquisitions activity.

In 2016, China overtook Japan to become the world’s second-largest overseas investor. Non-financial outward direct investment that year exceeded $170 billion, a 44% increase from the previous year, according to the Ministry of Commerce. However, such activity entails tremendous financial risk from the leverage taken on, a risk exacerbated by Chinese firms’ lack of experience with the integration and management challenges that M&A brings, especial in deals that cross national and cultural borders.

Anbang appears to fall squarely in this camp. On some estimates (its finances are notoriously opaque), it has encumbered itself with debt to the point that it is fast approaching technical bankruptcy despite having more than $300 billion of assets.

That also makes it ‘too big to fail’. State administration will provide the funding to keep its core life and non-life insurance business operationally solvent. The insurance regulator says the company’s current operations remain stable but that its solvency is seriously endangered by its ‘illegal operations’ unspecified but which presumably include its investments in prestige prime US real estate.

Last August, authorities announced a list of sectors hat should be off-limits for Chinese firms as the foreign investment spree into things like European football clubs and Hollywood entertainment businesses was exacerbating debt concerns.

More broadly, in the drive for financial stability and to forestall any systemic financial shocks, President Xi Jinping has been asserting greater control over state enterprises and reining in sprawling private conglomerates, notably the ‘big four’ — Angbang plus Dalian Wanda, Fosun International and HNA Group — that have expanded rapidly via debt-fuelled foreign acquisitions.

That quartet that accounted for 20% of Chinese foreign acquisitions in 2016. Also, there has always been a nagging suspicion that, given the quartet’s political connections, some of this M&A acted as a conduit for senior officials to get their money out of the country.

All have been ‘urged’ to sell assets and pay down their debt while state banks were told to rein in their lending to them. In January, the chairman of the Banking Regulatory Commission, Guo Shuqing, warned that ‘massive, illegal financial groups’ posed a grave threat to financial reforms and the stability of the banking system and that China would address the issue ‘ in line with the law’.

Taking Anbang into state control may be the prelude to a series of moves against the layer of private conglomerates below the ‘big four’, a group of some 25-30 companies said to be in the regulators’ sights. Despite or perhaps because of his connections, Wu’s treatment, in particular, is intended to show that no tycoon is immune from being ‘deterred’ from risky borrowing and investment overseas, or from being reminded that private M&A strategies should be integrated with national investment priorities.

New Rules For M&A In China, The Podcast

A quick update to a post from May about a paper from PricewaterhouseCoopers, the business advisory services firm, on the changing trends in M&A in China. We have now somewhat belatedly come across a 12-minute podcast version.

Three members of the firm, Alan Chu, China Business Services Leader in the U.S., Curt Moldenhauer, Transaction Services partner in Shanghai and Malcolm MacDonald, Transaction Services partner in Beijing, discuss the impact of the new five-year plan on M&A and the prospects for domestic, inbound and outbound deals as a result of Chinese firms having a combination of access to a fast growing domestic market and cheap capital. No great surprises, to our minds, but the trio rounds up the trends and issues into a coherent overview.

New Rules For M&A In China?

The marketplace for M&A deals in China is changing, with many western companies fearing a less hospitable reception as a result of new tax rules and regulations. PricewaterhouseCoopers, an international management consultancy, has a new paper in its 10 Minutes series arguing that the change is far broader than that as China’s priorities shift from acquiring capital to accelerating structural reforms, a change that “calls for a fundamental shift in deal-making strategy” on the part of foreign companies.

Its key points:

• Inbound and outbound M&A in China is booming, as Chinese industries consolidate domestically and expand globally.
• Foreign investors are entering or expanding in China for the China market instead of just manufacturing in China for export markets.
• As a result, they are reassessing what Chinese partners bring to the table and cautiously exploring alternatives to wholly foreign-owned enterprises.
• Private equity has emerged as an important provider of growth capital.
• Some investors recognize that new regulations affecting M&A may be creating short-term concern, but the long-term trend is toward greater clarity in a maturing system.

Those highlights read a bit penny plain, and the underlying piece adds some color, but do they fit with your experience?

China To Vet Foreign M&A On Broad National Security Grounds

China plans to vet proposed foreign takeovers of Chinese companies in the interests of national security. The State Council says it is establishing a ministerial level committee under the National Development and Reform Commission and the commerce ministry. It will start work next month and look at proposed foreign acquisitions in areas involving national defense, agriculture, energy, resources, infrastructure, transport, technology and equipment manufacturing. It will assess their impact on economic stability, social order and the country’s technology R&D efforts.

China is not the first country to set up such inter-agency scrutiny, though not many have given theirs such a broad remit. The U.S., for example, has its Committee on Foreign Investment in the United States (CFIUS). Its mandate is narrowly national security, though some conservatives want it broadened and the committee strengthened in response to China’s growing foreign direct investment.

China attracted $106 billion in foreign direct investment in 2010, up 17% on the previous (global financial crisis wracked) year. Foreign companies have not previously faced formal review of their proposed direct investments in China on national security grounds, although informal barriers have long existed and Beijing has always held an ultimate veto. In 2008 China introduced an anti-monopoly law (and promised the national security review mechanism that has now been announced). Coca-Cola’s $2.4 billion bid to take over Huiyuan Juice in 2009 was one that got stymied on competition grounds. Before that ArcelorMittal and Russia’s Evraz Group were rebuffed in attempts to buy into the steel industry.