As China transitions from prioritizing economic growth to maintaining economic stability, the government has begun levying steep penalties on high-debt private companies for “economic crimes.” Kiana Mendoza looks at several recent examples of these trials and examines what this could mean for the future.
On 9 May, former Anbang Insurance Group chairman Wu Xiaohui received an 18-year jail sentence for using his company to conduct embezzlement and fundraising fraud involving almost USD 12 billion. The trial concludes a fall from grace for Wu and Anbang – famous for their USD 1.95 billion purchase of the Waldorf Astoria in 2014— as Wu faced a forced resignation in June 2017 and the government’s seized control of Anbang in February. In an age of financial reform in China, the trial sets a worrying new precedent for the numerous private companies that have operated along Anbang’s debt-fueled growth model. As the Xi administration reforms its economic policy, the leaders of risky conglomerates will face increasing government scrutiny including detainment, seizure, and even jail time.
Hunting Grey Rhinos
After years of promises, the 19th National Party Congress in October formally shiftedChina’s priorities from speedy economic growth to stability. Part of this shift includes addressing “grey rhinos,” the widely acknowledged, yet ignored financial risks including the housing market and ballooning debt. The government has already enacted a serious and ongoing overhaul of its public sector, where state-owned enterprises (SOEs) are notorious for amassing large quantities of debt—about 50% of all bank lending in China. The Xi administration implemented policies that cut the number of SOEs from 117 in 2012 to 98, revised management structures, and changed to a profit-driven model that resulted in record high profits of USD 217.5 billion for 2017. Given the success of this transition, it is likely that the government will continue to target and reform any debt-making industries within its grasp—and extend its influence even to the private sector, all as part of a mad scramble to maintain economic stability.
If private firms are deemed a risk to the financial system, they could also face heavy government interference. The government can charge these private firms with “economic crimes” as the combination of the alarmingly high scale of their debt and their status as integral fixtures in China would put the entire country in jeopardy should they collapse.
In addition to Anbang, CEFC China Energy has been among the first to face this new wave of prosecution. The company and its chairman Ye Jianming gained national attention for their debt-fueled growth and ambitious purchases that included a USD 1.5 billion buying spree through the Czech Republic and plans to raise USD 9.1 billion for a 14% stake in Russian state-owned oil firm Rosneft. However, with USD 6.94 billion due in 2018 and a heavy reliance on state-owned China Development Bank, the company’s attempt for another ambitious purchase was a red flag for the country’s financial stability. After Ye was detained in early 2018 under suspicion of “economic crimes,” CEFC’s downward slide became inevitable: shares in CEFC plummeted, Ye was removed from his chairman position, the state-owned China Chengxin Credit Ratings downgraded CEFC’s credit rating, and the Rosneft deal was indefinitely frozen. Finally, the government-operated Shanghai Guosheng Group took over the company’s management. It is likely that CEFC’s purchasing will grind to a halt as it is forced to pay back its mountains of debt.
Anbang and CEFC are but two of the numerous conglomerates that heavily relied on government debt and overseas spending to turn a profit, and as the government continues its search for grey rhinos, hunting season is officially open. Another conglomerate, LeEco, reportedly owed as much as USD 1.54 billion and faced an onslaught of punishments including frozen assets, demands of early loan repayment, and the removal of Jia Yueting from his position as CEO. Jia is currently living in a thinly-veiled self-imposed exile in the US to escape the China Securities Regulatory Commission, which ordered him to return to China by the end of 2017 to deal with LeEco’s rising debt and concerned investors. If Jia returns to China, he is likely to face the same fate as Wu and Ye: detained and questioned for “economic crimes,” then stripped of all control of his company as the government seizes it and forces it to repay its loans.
HNA Group provides one last telling case study. The conglomerate reportedly owed USD 100 billion after its overseas acquisition scramble finally ended, and has since then been pushed towards a huge selloff of assets including South African Airline Comair, its USD 6.5 billion stakes in the Hilton, and commercial properties across the US totaling USD 4 billion. However, as HNA complies with government requests to liquidate assets, the conglomerate is receiving new lines of credit and support from state-owned banks China Citic Bank Corp and Bank of China Ltd. HNA is unlikely to halt spending entirely and may even stave off government management if they can manage their debts before Beijing decides to step in. The uneasy cooperation between HNA and the government may also hint at their already irreversible relationship. It is highly likely that HNA –known for its opaque management structure— is so closely tied to the government and the country’s economy that it cannot be allowed to fall the way that Anbang and CEFC did.
As the purge against these grey rhinos continues, firms in China will halt their acquisition sprees or find new ways to get money out of the country without raising alarms from the government. One likely possibility is more partnerships with companies rather than outright purchases; these are more likely with European firms than US firms due to rising protectionism and the Treasury Department’s willingness to prevent Chinese companies from operating there. However, it is also likely that China’s actions are too late to save itself from overwhelming debt. The government’s targeting of private groups like Anbang, LeEco, and HNA implies that their potential impact on the country’s economic health is so pivotal that the Xi administration is prepared to semi-nationalize them and send their former CEOs, chairmen, and founders spiraling from grace. As the country tightens its hold on both the public and private sectors in an effort to avoid a financial crisis, other private firms can expect intense scrutiny and new controls.