A new China worry is taking over Wall Street

An investor speaks on her phone next to an electronic board showing stock information at a brokerage house in Shanghai on January 27, 2016. Photo: Getty Images.

There is a new worry coming out of China, and it’s slowly taken hold of Wall Street.

The country’s government is cracking down on massive financial firms that have grown by making acquisitions overseas. You’ll recognise some of these names; Anbang Insurance, which recently bought the Waldorf Astoria; HNA; Fosun; Rossoneri; and Wanda.

All of these are private companies, but in China “private” is a relative term. Most of the executives at these firms have deep ties to the Communist Party, but not even those connections have been enough to squash reports that the government is telling banks to be careful about their credit exposure to these specific companies.

That’s leaving investors wondering what’s going to happen to the $US162 billion in debt these companies are holding.

“With new credit supply being more limited, one cannot rule out the possibility of whether some of the companies involved might be unable to honour some of their financial obligations,” wrote analysts at Credit Suisse in a recent note.

“If this happens, it could bring in sharp corrections to their listed stocks and bonds, and could affect the listed financial instruments of other Chinese companies. This could also make Chinese banks more cautious in providing credit to the private sector.”


This is all happening, in part, because these companies were once allowed to go on asset buying sprees and now they’re simply not. Deal flow started slowing down in 2016, as the Chinese government started talking about financial reform more openly (if not always earnestly).

Over that time, these companies collected $US700 billion in assets all over the globe, according to Credit Suisse, and some of those deals have been quite controversial.

The Wall Street Journal just did a piece covering several issues at HNA. The whole thing is worth a read, but it mostly tells the story of Tarvana, a San Francisco based travel firm HNA bought in 2015. Over a year later the company filed for bankruptcy, with accusations that its HNA appointed board engaged in “self-dealing, corruption, wrongdoing and bad faith” which ultimately killed the company.

The story also touches on HNA’s investment in Nicklaus Club, a Monterey, California-based golf club. There, HNA stopped contributing to employee insurance plans which resulted in their cancellation. According to the report, HNA also took months to make much needed improvements to a well on the club’s grounds and was delinquent on payments to a homeowners association with which Nicklaus shared a residential compound.

And these were not particularly large payments either — not for an international dealmaking giant — just $US150,000 here and $US15,000 there. Makes you wonder.

The eye in Beijing

But again, if you were worried about China Inc. buying up the entire world, you can rest easy for a moment. The Chinese government not only wants to limit the impact of high debt levels on its financial system, but also wants to keep money inside the country as it enacts reforms.

Now, that doesn’t mean these companies will go bankrupt. Credit Suisse pointed out that the Chinese government isn’t interested in shocks to the system either, so it may backstop disaster (and it may not). Even so, that means these once high-flying international dealmakers are now pariah’s in China’s banking sector and will have to use their cash reserves to pay down debt for no-one-knows-how long.

“If they cannot honour their financial obligations, there is a chance that it could create a domino effect on other institutions/individuals which have lent money to them,” said Credit Suisse. “Among them, the development of Anbang Insurance is worth the most attention, as it probably is having the closest relationship with retail investors through its insurance products. “

This relationship is likely why Anbang Chairman Wu Xiaohui — who last year met with President Trump’s son in law, Jared Kushner, about investing in Kushner’s real estate company — was taken into custody by Chinese authorities earlier this year. Anbang also has a 20% stake in China’s largest private bank, China Minsheng Bank.

Wu’s disappearance happened much like most executive disappearances do in China. It started with a rumour, which was countered with a denial, until finally the story was eventually confirmed.

Sometimes that’s how bankruptcies start too.

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