Evergrande: just one of many problems for China – Arthur Kroeber

 

Arthur Kroeber

China faces not only its most prominent problem Evergrande but a range of issues, says leading economist Arthur Kroeber in the New York Times. Shortage of electricity, dealing with its big tech companies and many other in-debted giants offer similar challenges. “The common feature of these crises: All were triggered by government policies,” he writes.

Arthur Kroeber:

Crushed by $300 billion in debt, Evergrande, one of China’s biggest property developers, is sliding toward bankruptcy. This has prompted fears of a wider property crash or even a financial crisis.

But this is hardly the only crisis besieging the government of Xi Jinping. An unexpected electricity shortage threatens to slow down manufacturing. And for the past year, the government has waged a fierce campaign to regulate China’s vibrant internet companies, spurring hundreds of billions of dollars in investor losses.

The common feature of these crises: All were triggered by government policies. In the eyes of Beijing, these policies are meant to fix deep structural problems in the economy and lay more solid foundations for future growth. To many outsiders, they represent a dispiriting retreat from the market-oriented reforms of the past and signal the end of China’s long economic boom. But forecasts of China’s doom are most likely mistaken, as they have so often been.

True, in the latest quarter, economic growth slowed to a crawl, growing by just 0.2 percent compared with the previous quarter. The next several months will be rockier still. Slower growth in China is unwelcome news for a global economy struggling to regain its footing after the disruptions of the Covid-19 pandemic. But over the next few years, China is likely to regain momentum — in part because of the hard work it is doing now.

The biggest immediate worry is the collapse of Evergrande. Like most Chinese property developers, it relies on two key funding sources: deposits paid by home buyers before construction and huge amounts of debt.

Evergrande’s woes result from a government campaign begun last year to force property developers to reduce their liabilities. It is the latest move in a five-year effort to bring the country’s debt under control. According to the Bank for International Settlements, China’s gross debt level, at 290 percent of G.D.P., has doubled since 2008. While that level is comparable with that of rich countries with well-developed financial systems, it is high for a middle-income country. China’s leaders know that to avoid a financial crisis or avoid a repeat of Japan’s stagnation of the 1990s — the aftermath of a big debt-fueled property bubble — growth in the future must be far less reliant on debt than it has been.

The problem is that by attacking debt in the property sector, regulators risk shutting off a powerful engine that directly or indirectly affects as much as a quarter of China’s economic growth. Problems are spreading beyond Evergrande. Other developers are having trouble repaying their debts. And the sales and construction of new housing are both falling.

More in the New York Times.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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HNA downfall signals end of guanxi-economy – Victor Shih

 

Victor Shih

The arrest of HNA founder and group chairman Chen Feng, and CEO Tan Xiangdong, last week was yet another signal indicating a major change in China’s economic relations, based on guanxi or old-style relations between power brokers, says political analyst Victor Shih to Bloomberg.

Bloomberg:

Unlike the technology giants — whose success and control of big data have made them a target — HNA grabbed the government’s attention for a different reason. Under the leadership of Chen and Wang, the group took advantage of the easy credit that swirled in China in the twenty-teens to fund a raft of overseas acquisitions. Deals worth more than $40 billion included significant stakes in Deutsche Bank AG and Hilton Worldwide Holdings Inc., luxury properties such as golf courses, landmark hotels across six continents and the 648-foot skyscraper 245 Park Avenue in Manhattan.

When Beijing became aware of the risks of such capital flight and leverage, it started to clamp down on the big acquirers. The high-flying Anbang Insurance Group, owner of New York’s Waldorf Astoria hotel, was seized by the government in 2018. HNA’s slow-motion unraveling began soon after, with it shedding assets as debt repayments loomed. The group still faces at least $63 billion in claims from creditors.

“Chen shared the same strategy of many business people with political connections — they used their connections to borrow as much money as possible from state-owned financial institutions,” Victor Shih, an associate professor who specializes in Chinese financial policies and elite politics at the University of California San Diego, said in an interview before Chen’s detainment. “The way that these conglomerates used leverage to over-pay for overseas assets rapidly was not sustainable and resulted in catastrophic deleveraging.”

Debt was the foundation stone for Chen and Wang’s ambitions. Both devout Buddhists, they set their sights on HNA becoming one of the top companies in the Fortune 500. Credit-fueled expansion helped the conglomerate rise 183 spots to 170th by 2017, but also sealed its fate within months as debt ballooned to more than $93 billion the following year.

More in Bloomberg.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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What do auditors know about HNA? - Paul Gillis

Paul Gillis

Beida accounting professor Paul Gillis points at his weblog at the rumor Goldman Sachs has decided to suspend work on a HNA subsidiary IPO in the US, because they are unable to get enough information on this Chinese conglomerate. Gillis wonders what auditor PwC knows about their client.

Paul Gillis:

There is a shocking report that Goldman Sachs has suspended its work on HNA’s planned US IPO of subsidiary Pactera because it was unable to meet the bank’s internal “know your customer checks”.  HNA has been criticized for its opaque ownership structure, but it is surprising that Goldman Sachs could not get a look under the sheets. 

Bank of America Merrill Lynch, Citigroup and Morgan Stanley were reported earlier to have dropped HNA because of concerns over completing know your customer checks. 

HNA’s public companies are audited by PwC. This raises the question of how PwC is able to continue as auditor. Auditing standards require auditors to annually assess whether to continue a relationship with a client.

More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Ownership companies mostly remains opaque - Victor Shih

Victor Shih

HNA was the last in a row of Chinese conglomerates, losing support from their most important financial backers. In the slipstream details emerged about the hidden ownership structure behind HNA. But most of these ownership relations remain opaque says political analyst Victor Shih to Fortune.

Fortune:

Yet HNA has not chosen previously to open its books on the group's ownership structure. That left others to discern that high-level political connections have allowed HNA to borrow freely and expand rapidly, at a time when others have faced hurdles doing so. 

"A company cannot obtain lines of credit without either being a state-owned enterprise or high-level connections with the political elites," says Victor Shih, associate professor of political economy at the University of California at San Diego. "There are hundreds of Chinese companies trying to borrow billions overseas, and only a few obtain these large lines of credit." 

Also under increasing scrutiny is HNA's debt load to state-owned Chinese banks. In December, for example, it bought Ingram Micro for $6 billion—in cash—in a deal partly financed by the Agricultural Bank of China, China Construction Bank, Bank of China, and others, according to information given earlier this month to Fortune. In the minds of some, HNA—a privately held company—is increasingly tied to China's government, through its heavy debt... 

Untangling fine details over HNA's ownership structure is highly difficult, say analysts, who caution that much of the details are inaccessible, through a web of different companies. "The [Chinese] elites are very practiced at using dozens of shell companies to conceal ownership," says Shih.

More in Fortune.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form. Are you looking for more political analysts at the China Speakers Bureau? Do check out this list.