China’s grey rhino hunt should extend beyond its tycoons
William Pesek says regulators realise the country is setting itself up for a reckoning similar to that of Korea in 1997, as debt-ridden firms expand abroad. But state-held giants, too, are concentrating financial risks at the top
China’s tycoons seem to be having a Russian oligarch moment, as Beijing suddenly decides they’ve grown too big, too unaccountable and too opaque for comfort. In the Chinese context, that’s code for Xi Jinping’s (習近平) government worrying that globally acquisitive conglomerates like Anbang Insurance, Dalian Wanda , Fosun , HNA and Zhejiang Luosen Neili are growing too big and too indebtedto fail. Hence the chatter about taming the “grey rhinos” – obvious, high-impact threats that can abruptly run away from officials.
The optics of the empire (the Communist Party) striking back at the business empires that a month ago were sources of national pride are odd for sure. What are the “Belt and Road” and the Asian Infrastructure Investment Bank if not parallel efforts to widen China’s global footprint, boost market share and export the mainland’s overcapacity problems?
Still, regulators are scrambling to clamp down on sprawling private enterprises using political connections to gorge on cheap state-bank debt and imperil a financial system that has become too top-heavy. In other words, Beijing is curtailing tycoons who may have become not too Russian, but too Korean.
Economists always try to extrapolate where a crisis might be heading by looking to the past. Japan’s 1990s debt collapse certainly offers Beijing lessons. So does Wall Street’s 2008 crash, with eerie parallels to China’s shadow-banking risks today. The best corollary may be Asia’s 1997 reckoning, particularly in conglomerate-heavy South Korea.
Beijing tongues are wagging over Xi’s true motivation in targeting five private-sector giants. It’s entirely possible this is about reducing the clout of party elders who, through family ties, get fantastically wealthy from this overseas mergers-and-acquisitions drive. It could be an attempt to avoid a major capital flight. This also could be aimed at giving the state sector, one Xi pledged to curb, even more latitude to export overcapacity to Africa, Latin America, Southeast Asia and North America. In other words, making China even more top-heavy if that debt-fuelled expansion goes bad or ratings agencies pounce.
What went wrong in Korea? Actually, the issue is more what’s still going wrong 20 years after its conglomerates, or chaebol, toppled Asia’s fourth-biggest economy. Like China’s state-owned enterprises, the chaebol were national champions empowered to fuel South Korea’s rise to global relevance.
Names we know today as Samsung, Hyundai, LG, Daewoo and Hanwha harnessed cosy political ties and cheap financing to expand aggressively around the globe. They spread their tentacles too far, too indiscriminately and too impenetrably for Seoul to track. In 1997, when Asia’s currencies fell, epic debt loads became impossible to service and the economy listed like a poorly balanced supertanker before sinking altogether.
The other problem, one that persists today, is economic concentration. The chaebol aren’t just too big to fail, but too big to cross. Leaders from Kim Dae-jung (who took office in 1998) to the recently impeached Park Geun-hye talked a great game of curbing chaebol excesses. Once growth slowed, each turned to the family-owned giants to gin up GDP. Park is in jail for shaking down the chaebol for tens of millions of dollars (putting Samsung’s leader in prison, too). Current president Moon Jae-in has pledged to wield regulatory, investigative and judicial axes at a handful of companies towering over all else.
Curtailing Korea’s own rhinos would create more innovative oxygen for small-to-midsize enterprises to create jobs from the ground up: Korea is still too concerned with protecting jobs from the top down. But China is setting itself up for a similar reckoning, as power remains concentrated in limited clusters of debt-ridden, murky companies with questionable political priorities spreading their wings abroad.
Financial risks are reasonably well known. Those concerns made Beijing’s move to open its US$10 trillion bond market last month a flop with foreign punters. Memories are fresh from Moody’s downgrading Beijing in May for the first time since 1989. It was a sign the bill is due for the bubbles in debt, credit and property that China created since the 2008 global crisis. That is a roughly US$30 trillion debt burden when you add up government, corporate and household debt (and that’s just what we know of). The state sector’s share of that tally is roughly 43 per cent.
That said, there may indeed be valid reasons to curb China Inc. Its dizzying overseas buying binge amounted to nearly US$350 billion in the past few years. Hence Beijing’s edict that they sell off some of the offshore empires they are building. Good news for non-Chinese investors looking for bargains, but a reminder that political risks are increasing, too. Could the e-commerce set find themselves in trouble for venturing too far afield with expansion efforts? No one will know until it’s too late, least of all foreigners.
Political risk sure caught up with HNA, whose plight is making global headlines. The little-known airline operator made more than US$40 billion of acquisitions since January 2016. Its debt-fuelled expansion saw it betting on tourism (Hilton Hotels), finance (Deutsche Bank), logistics and even stumbling into Trump world. The communications director President Donald Trump hired and fired in the space of 10 days, Anthony Scaramucci, is trying to sell his hedge fund to HNA, a company reportedly owned by charities in Hainan island and New York.
Surprises on the political front can come from abroad, too. The conventional wisdom that China can avoid a debt crash ignores clear and present dangers emanating from Trump’s Twitter feed. Fed up with Xi’s inability to rein in North Korea, scandals at home and a legislative agenda in tatters, @realDonaldTrump could change the subject at any moment by precipitating a trade war that knocks top-heavy China off balance – or on its back.
It is vital that Xi address China’s chaebol problem faster and more firmly than Korea has. But the problem is bigger than a few oligarchs or rhinos, it extends to the herd of state-owned giants hogging up economic energy and concentrating risks at the very top.
William Pesek is a Tokyo-based journalist and the author of Japanization: What the World Can Learn from Japan’s Lost Decades. Twitter: @williampesek