Noose Tight­ens on Dan­ger­ous Debt

NewsChina - - EDITORIAL -

China's in­surance reg­u­la­tor an­nounced on Fe­bru­ary 23 that it had seized con­trol of An­bang In­surance Group and that its chair­man, Wu Xiao­hui, had been charged with fi­nan­cial crimes that in­cluded il­le­gal fund-rais­ing, fraud and em­bez­zle­ment. The reg­u­la­tor said it would run the com­pany for a year.

An­bang's fall sug­gests China is fi­nally tak­ing de­ci­sive ac­tion against se­ri­ous and preva­lent vi­o­la­tions of fi­nan­cial reg­u­la­tions that have un­der­writ­ten the emer­gence of fi­nan­cial gu­rus like Wu at the cost of the coun­try's fi­nan­cial health.

Start­ing out as a small car in­surance com­pany in 2004, An­bang emerged to be­come one of China's big­gest fi­nan­cial firms, and at its peak held as­sets of some 190 bil­lion yuan (US$30B). An­bang's growth model was sim­ple: raise funds and pur­chase real es­tate. Its most prom­i­nent ac­qui­si­tion was the US$2 bil­lion deal to pur­chase New York's land­mark Wal­dorf As­to­ria ho­tel in 2015.

An­bang's ex­pan­sion came not through shrewd en­trepreneur­ship but the ag­gres­sive use of ex­tended lever­age, which it­self was fa­cil­i­tated through the pow­er­ful po­lit­i­cal con­nec­tions of An­bang's founders.

The tac­tic of us­ing over-ex­tended lever­age by Chi­nese fi­nan­cial and real es­tate com­pa­nies has se­ri­ously threat­ened China's fi­nan­cial sta­bil­ity and dam­aged the cor­po­rate cul­ture of the fi­nan­cial and real es­tate sec­tors. In re­sponse, the au­thor­i­ties tight­ened con­trol of cross-bor­der over­seas pur­chases in the real es­tate sec­tor last year, telling many com­pa­nies to re­duce their debt level. Among the most af­fected is Wanda Group, China's big­gest real es­tate com­pany.

Not only has Wanda sus­pended and ter­mi­nated its planned over­seas pur­chases, it has also sold many of its projects in or­der to re­duce its debts. In July 2017, Wanda reached a deal of 63.2 bil­lion yuan (US$9.3B) with Sunac, a ma­jor prop­erty de­vel­oper, to sell some of its ho­tels, land and projects.

In the mean­time, China's au­thor­i­ties have strength­ened their push for Chi­nese com­pa­nies to make over­seas pur­chases in man­u­fac­tur­ing and other sec­tors of the real econ­omy.

The lat­est ex­am­ple is the an­nounce­ment by Li Shufu, owner of Geely au­to­mo­tive group, that he had ac­quired a US$9 bil­lion stake in Daim­ler AG, the Ger­man maker of Mercedes-benz cars and trucks.

With the fall of An­bang, the Chi­nese gov­ern­ment has sent a clear mes­sage to the mar­ket that it will crack down on the busi­ness ex­pan­sions that rely on po­lit­i­cal con­nec­tions and em­ploy ag­gres­sive lever­age.

As the Chi­nese gov­ern­ment has now adopted high-qual­ity growth as the core of its eco­nomic strat­egy, China needs to con­tinue to step up its fi­nan­cial reg­u­la­tions to nur­ture a fair and healthy busi­ness en­vi­ron­ment that re­wards in­no­va­tion and en­trepreneur­ship, in­stead of spec­u­la­tion and fam­ily con­nec­tions. This is the only way China will de­velop a high-qual­ity econ­omy.

CHINA Is fi­nally tak­ing de­ci­sive ac­tion against se­ri­ous and preva­lent vi­o­la­tions of fi­nan­cial reg­u­la­tions

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