China Vanke

Here’s why Evergrande’s pursuit of Vanke failed: politics

An Evergrande-Vanke merger, backed by Baoneng, will create a mega developer that’s too big for Beijing to ignore, or trust

PUBLISHED : Tuesday, 20 December, 2016, 5:22pm
UPDATED : Tuesday, 20 December, 2016, 11:11pm

The control of China Vanke, the country’s largest property developer, has always been a political matter, not economic or business. So it was too, with the spectacular failure of China Evergrande and Baoneng Group in their pursuit of Vanke.

Over the last two weeks, mainland regulators have not only named and shamed Evergrande and Baoneng, but also sent in investigators to study their insurance units. All these have forced their sale of insurance products – a major source of funding - into almost a halt.

The pair were brought to their knees.

Evergrande announced on state TV that it no longer had any plan to gain control of Vanke. In less than 24 hours, Vanke said it no longer needed a white knight to help it fend off the barbarians at its gates.

Evergrande has only itself to blame, though not for its “bad boy” behaviour suggested by the insurance regulator. That’s nothing but just an excuse.

Evergrande’s official guilt is to use the insurance premium earned from its unit to acquire listed companies. The reality is regulators have known this for months, but have done nothing.

Baoneng had used 10.4 billion yuan of insurance premium to accumulate a stake in Vanke, leveraging it into a 43 billion yuan bet, using wealth management products issued to banks, according to a July report by Xinhua News Agency.

The controversial operation breached no rules, because it was structured around existing regulatory loopholes caused by poor coordination among regulators, Xinhua said, citing information from government investigators.

The regulator also said insurer should not buy control of listed companies. Yet it left Anbang Insurance untouched. Anbang has spent at least 70 billion yuan acquiring controlling or majority stakes in 10 listed firms, gaining board seats in five of them over the past four years.

Evergrande was wrong for a different reason; the blood that flows in its chairman’s veins are of a different colour to China’s princelings.

Evergrande’s chairman Hui Ka-yin has been trying hard to make himself one.

He is a top spender on soccer, President Xi Jinping’s favourite sport. He hired World Cup winner Marcello Lippi to head his team and brought home China’s first Asian champion. He coaxed Lippi into coaching the national soccer team within weeks of the Chinese team’s defeat by war-torn Syria and agreed to foot 90 per cent of Lippi’s salary. It was a replay of his strategy with Lang Ping who went on to coach the national women’s volley ball team, winning the country an Olympic gold medal this summer.

Hui has made many important friends through sports. They helped Evergrande with various approvals and therefore its expansion.

Yet, acquiring Vanke is a different league entirely.

A merger of Vanke and Evergrande would create a mega developer with 144.6 billion yuan of total equity and a combined annual revenue of 270 billion yuan (US$38.8 billion), dwarfing state rivals Poly Real Estate and China Overseas Land & Investment by a significant degree.

Baoneng’s earlier pursuit of Vanke was very different. Even if successful, it would’ve changed little the industry’s balance of power between the state and the private sectors, given Baoneng’s tiny foothold and expertise. The hunt was therefore tolerated.

A marriage of Vanke and Evergrande, with the support of majority shareholder Baoneng, would however, be a game changer.

It would be hard to convince Beijing to trust Hui with such a dominating empire despite all the allegiance he has pledged with his billions. Let’s not forget that property has always been an important lever in the country’s economy.

Neither does Evergrande’s competitors, be they state-owed or private, want to see Evergrande – a notorious risk taker - become a behemoth. Different players and their backers have been lobbying hard in the past two months.

To detractors, Evergrande’s manipulative punting in the A-share market is probably a God sent. Authorities were furious that it had bought and sold shares in companies immediately after announcement of its purchase drove up prices.

The rest is history.

Vanke will stay what it is for the moment, allowing time for Evergrande and Baoneng to unwind their 35 per cent shareholdings, valued at 75 billion yuan.

Now, everybody knows there aren’t many takers for that kind of stake, other than to the state.