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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How do auditors deal with guanxi? - Paul Gillis

Paul Gillis

Guanxi, your informal network of friends and allies, might never be far away in China. But when it comes to the auditors of your firm, guanxi can get tricky. Accounting professor Paul Gillis reviews on his weblog a recent academic paper about this touchy issue.

Paul Gillis:

Auditors are not immune to the pressures of culture. The authors observe that “Chinese auditors are entrenched in the guanxi culture and psychologically bonded to their clients. This psychological tie created by guanxi leads auditors to trust their clients and act as advocates for the client.”  That is not the way auditors are supposed to behave. Auditors are supposed to be independent of management. The presence of guanxi undermines independence and destroys the credibility of audits. 

The authors say “the strong psychological bond makes it difficult for Chinese auditors to distance themselves from managers and maintain independence in mind during the audit work." The authors argue that “many problems relating to Chinese auditing practice can be attributed to the guanxi network where auditors act as an advocate for the manager and even collaborate with the manager in illegal or unethical acts.” In other words, guanxi can lead to an audit failures and we have certainly seen plenty of them in China. 

The Chinese Institute of CPAs is well aware of the practice of guanxi, and its code of ethics, Article 165, specifically forbids auditors from accepting gifts from clients. I don’t know the extent to which that is followed in practice. 

Audit committees should take responsibility for evaluating the independence of auditors. Required rotation of audit partners is helpful, but periodic rotation of firms might also be a prudent step. I would also recommend that audit committees ask difficult questions about personal relationships between company managers and the audit team. As an audit committee member, I would be very skeptical when a new CFO wants to onboard a new CPA firm. Often the CFO has a guanxi relationship with the new CPA firm that makes them part of his team. You don’t want the auditor to be on the CFOs team.

More at the ChinaAccountingBlog.

The reviewed paper is: Ning Du, Joshua Ronen, and Jianfang Ye (2015). Auditors’ Role in China: The Joint Effects of Guanxi and Regulatory Sanctions on Earnings Management.Journal of Accounting, Auditing & Finance, Vol. 30(4) 461–483.

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.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.  

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Talking to strangers: Tricia Wang at the Berkman center

+Tricia Wang 

Young Chinese use social media to develop a new public sphere, away from the old concepts of family ties and Guanxi, argues sociologist Tricia Wang in her Phd. On February 18 she will talk about this subject at the Berkman Center for Internet and Society at the Harvard University. 

From the invite:

When we read about the Chinese internet in the Western press, we usually hear stories about censorship, political repression, and instability. But there's a lot more to be learned about life on the other side of “The Great Firewall.” 

Based on over 10 years of ethnographic research, Tricia Wang's fieldwork reveals that social media is creating spaces in China that are shifting norms and behaviors in unexpected ways. Most surprisingly, Chinese youth are sharing information and socializing with strangers. She argues that they are finding ways to semi-anonymously connect to each other and establish a web of casual trust that extends beyond particularistic guanxi ties and authoritarian institutions. 

Chinese youth are discovering their social world and seeking emotional connection—not political change. Tricia argues that this reflects a new form of sociality among Chinese youth: an Elastic Self. Evidence of this new self is unfolding in three ways: from self-restraint to self-expression, from comradeship to friendship, and from a “moral me” to a “moral we.” This new sociality is lying the groundwork for a public sphere to emerge from ties primarily based on friendship and interactions founded on a causal web of public trust. The changes Tricia has documented have potentially transformative power for Chinese society as a whole because they are radically altering the way that people perceive and engage with each other.

You can rsvp for the meeting at 18 February at 12:30pm ET, or follow the proceedings online. Please follow the link for the details at the Berkman site.

Tricia Wang is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

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Guanxi helps

A beautiful scene in Chongqing where obvious somebody has been very succesful in saving his or her house. Marc van der Chijs pointed at the picture and he has all the details.