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China economy

China’s battle plan against tycoons prompts Xiao Jianhua firm to sell US$23 billion of assets

Beijing is taking three approaches to conglomerates that have ramped up risks with their involvement in financial sector

PUBLISHED : Thursday, 08 March, 2018, 9:32pm
UPDATED : Friday, 09 March, 2018, 10:24am

The business empire controlled by Chinese tycoon Xiao Jianhua will divest itself of 150 billion yuan (US$23.7 billion) worth of assets this year to repay bank loans, after offloading investments of about 100 billion yuan since he returned to the mainland from Hong Kong in mysterious circumstances early last year, a well-informed source told the South China Morning Post.

Tomorrow Holdings, Xiao’s primary corporate vehicle, and a vast network of affiliated ventures were divesting assets under directions from the Chinese authorities because his opaque business, with hundreds of corporate vehicles, had accumulated risks high enough to endanger the country’s financial security, the source said.

Proceeds from the sale of the assets are meant to be returned to the state banks, the source said.

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It is part of Beijing’s efforts to prevent systemic risks in China’s financial industry, with a number of private conglomerates targeted for excessive borrowing. President Xi Jinping has listed financial risk control as a top priority for the country over the coming years. The process of streamlining Xiao’s empire is meant to be a “showcase” of financial risk control, the source added.

“Instructed” divestment, as in Xiao’s case, is one of three approaches Beijing has adopted to deal with tycoons. Property and investment conglomerate Dalian Wanda Group, owned by Wang Jianlin, and airline and property conglomerate HNA Group had been told to do similar things, the source said, with both having rushed to sell assets.

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In that model, tycoons like Xiao had been ordered to “save themselves”, meaning they had to move fast to sell assets so they could repay debts and spare the government from having to bail them out, the source said.

It is a relatively “gentle” approach compared with Beijing’s approach towards Anbang Insurance Group, which is under regulatory takeover. Anbang angered China’s top leadership because it had raised funds by selling high-risk, short-term insurance policies to millions of retail investors, the source said. Former Anbang chairman Wu Xiaohui is facing prosecution in Shanghai for “fraudulent fundraising”, according to a Shanghai court notice. It is a serious charge and Wu could be jailed for life if found guilty.

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The third approach taken by Beijing in dealing with the country’s private tycoons is guidance, as in the case of CEFC, China’s largest non-state-owned oil conglomerate. The source said CEFC chairman Ye Jianming is not under investigation, whereas previous reports had said he had been detained for questioning. A task force had been established under the leadership of Shanghai vice-mayor Wu Qing, who is also a former chairman of the city’s stock exchange, to assess CEFC’s debt risks and work out a plan to reduce them.

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From the government perspective, the CEFC case was less serious than Anbang because the company’s creditors were a few big state banks, not millions of retail investors, the source said.

Xiao had been cooperative with the authorities and was now under “house custody” with the means to manage his company while his whereabouts were monitored, the source said, adding that Xiao had already repaid “a considerable part of the bank loans”.

Tomorrow Holdings’ risks would be brought down to a “very controllable” level after smooth asset disposals this year, the source said.

Some of Xiao’s assets sales have been made public via stock market filings. For instance, a 25 per cent stake in Huaxia Life Insurance, a company indirectly controlled by Xiao, was sold in November for 31 billion yuan. In January, Hengtou Securities, another Hong Kong-listed company affiliated with Xiao, agreed to sell a 29 per cent stake for 9 billion yuan to a unit of China’s state-owned Citic Group.

Xiao, who had been living at the luxury Four Seasons Place serviced apartments in Hong Kong before his return to the mainland in late January last year, has not been charged with any offence.

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His return to the mainland on Lunar New Year’s Eve to assist investigations came as Chinese regulators started to rein in the country’s once powerful private conglomerates by blocking their freewheeling financing, cracking down on irregularities and in some cases even taking over their businesses.

With a complicated shareholding structure involving shell companies and proxies, Xiao and his investment vehicle, Tomorrow Group, had direct or indirect investment in more than 1,000 mainland A-share companies, the source said, and that had become a risk factor too big to be ignored.

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Wanda sold most of its hotel and tourism portfolio to rivals in one go in July last year for US$9.3 billion. Wang said the proceeds would mainly be used to repay bank loans. Sources told the Post Wanda was seeking another buyer to take over all five of its big projects in Britain, the United States and Australia for US$5 billion.

HNA is in the process of offloading US$6 billion in real estate holdings around the world. HNA told creditors it would seek to sell about 100 billion yuan (US$15.7 billion) of assets during the first half of this year, Bloomberg reported in late January.

The government takeover team at Anbang is seeking to sell assets – including the Waldorf Astoria Hotel in New York, insurers in South Korea and the Netherlands, and property in Canada – that the company bought for US$13 billion.

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Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said there was a rationale behind Beijing’s tough measures against China’s tycoons.

“In mature markets, financial regulation is mainly conducted through regulation of financial institutions,” he said. “In China, some conglomerates have expanded themselves to cover a whole industry chain from deposit taking to real economy investment, which makes traditional ways of financial regulation ineffective.

“There has been a clear transition from the top leadership to shift their focus from stabilising growth to removing systematic risks after the 19th Communist Party Congress [in October], as near-term economic growth pressure eases.”