Another piece in the Chinese capital-flow puzzle.
Chinese conglomerates that had gone on a debt-fueled buying binge over the past decade but have come under heavy pressure from the government to sell their overseas holdings in order to reduce their astronomical debts – well, they’re doing it.
In the US, Chinese conglomerates have dumped $26 billion in assets so far in 2019, up from $8 billion in the full year of 2018.
Globally, Chinese companies have agreed to sell about $40 billion in overseas assets so far this year. This now exceeds the already heavy pace of selling for the full year of 2018, which totaled $32 billion, according to data from Dealogic cited by the Financial Times. But the buying hasn’t totally stopped: So far this year, Chinese companies have acquired $35 billion in assets globally.
This made Chinese companies a net seller of overseas assets for the first time in the data going back to 2009.
In 2015, Chinese conglomerates sold only $10 billion of overseas assets but acquired $100 billion of assets, for a net increase of $90 billion.
In 2016, the peak of China’s debt-fueled, haphazard, glory-driven acquisition binge, these conglomerates acquired over $200 billion in assets overseas, as observers scratched their heads, while sellers laughed all the way to the bank.
Since then, Chinese companies have come under heavy scrutiny in the US, particularly over issues related to intellectual property (IP) that China stands accused of trying to obtain by hook or crook, including by outright theft, by mandatory tech transfer when US companies want to do business in China, and by acquisition of US tech companies. This scrutiny has scuttled acquisitions by Chinese companies of US tech companies, including of US tech startups. And it is discouraging further acquisitions.
But tech acquisitions are still favored and supported by the Chinese government. What the government has cracked down on are glamour acquisitions of luxury hotels, movie theater chains, real estate developments, air lines, air-line related companies, and the like – the things that the US government is less critical of and would allow to proceed.
Part of the funding of these foreign adventures came from foreign-currency debt originated overseas. But this source of funding has tightened up as defaults among Chinese companies hit a record in 2018.
Defaults have continued unabated in 2019, amid worries about the accuracy of financial reporting by Chinese companies. Companies suddenly were out of funds and defaulted on debts, though they had piles of fake cash on their balance sheets that, upon further examination, did not to exist. Official concerns over fake financial statements reached such heights at the end of July that China’s regulators halted 46 IPOs and bond offerings.
And there have been some regional banks that were bailed out by the government to prevent their disorderly collapse and contagion. And credit has tightened. And companies are forced to deleverage.
Many of the overseas assets now being sold by Chinese conglomerates were acquired during the acquisition boom in 2016 in the US and Europe.
HNA has come under heavy pressure after a legendary debt-fueled acquisition binge that totaled 30 companies in the two-year span between mid-2015 and May 2017, after which it suddenly ended:
- The final act: the $2.2-billion purchase in May 2017 of the office tower at 245 Park Avenue in Manhattan. At $1,282 per square foot, the price was among the highest ever paid for this type of asset.
- The $6.5 billion for a 25% stake in Hilton Hotels.
- The $3.7-billion (value at the time) for a 9.9% stake in Deutsche Bank.
- The $6 billion acquisition of Ingram Micro in California, the world’s largest IT distributor.
- The $2.5 billion acquisition of aircraft leasing company Avolon Holding.
- The $1.5 billion acquisition of airline caterer Gategroup
- The $2.8 billion acquisition of Swissport, the world’s largest airport ground and cargo handling company.
- The $10 billion acquisition of CIT Group’s aircraft-leasing unit, which was combined with to HNA’s Avolon Holdings to create the world’s third-largest aircraft leasing fleet.
A portion of the debt funding for these deals came from state-owned banks in China. And a portion came from US and European banks, including JPMorgan Chase, Natixis, Deutsche Bank, UBS, Barclays, and Societe Generale.
Now, HNA is busily trying to unload these assets, which is a lot harder than buying them. This year alone, these sales include:
- Sold another batch of Deutsche Bank shares, reducing its stake to 6.3% (from 9.9% in 2017)
- Sold its stake in Hong Kong International Construction Investment Management Group to Blackstone;
- Sold budget airline Hong Kong Express Airways to Cathay Pacific Airways.
- Sold its 90% stake in the Manhattan office tower, 850 Third Avenue (at a $41 million loss).
- Sold its 74% stake in Austrian asset manager C-Quadrat, which had become infamous as the vehicle through which HNA had acquired its stake in Deutsche Bank via a complex and controversial series of derivatives.
- Sold an office tower in Beijing to Vanke, a large real estate developer in China.
- Is close to a sale of Ingram Micro to an investor group led by RRJ Capital, according to “people familiar with the matter.”
Other Chinese conglomerates have come under, let’s call it, ultimate pressure, such as Anbang Insurance, which was seized by the Chinese government in 2017 and its chairman was arrested. It has since unloaded a big chunk of its overseas assets, including last week, a portfolio of 15 luxury hotels to a Korean firm for over $5.8 billion.
These hotels include several in California – San Francisco’s Westin St. Francis, the Loews Santa Monica, the Four Seasons Silicon Valley, the Montage Laguna Beach, the Ritz-Carltons in Half Moon Bay and in Laguna Niguel – plus hotels such as the Essex House in Manhattan and the InterContinentals in Chicago and Miami.
Anbang is still sitting on its Waldorf Astoria in New York, which it had acquired in 2015 for $1.95 billion, the highest amount ever paid for a hotel in the US. The hotel is closed for renovation.
Chinese authorities have cracked down on overseas acquisitions and have forced companies to unload properties in part to put a stop to the debt binge by Chinese companies and force them to deleverage before it all blows up in a disorderly fashion; and in part to curtail capital flight.
China’s capital controls are being rolled out in waves, impacting variously companies and individuals. Investments in real estate have been targeted in particular. And a new batch of capital controls arrived two weeks ago. Read… China Imposes New Capital Controls, Targets Foreign Real Estate Purchases, as Yuan Falls to 11-Year Low
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