How China ran 3 companies too big to fail

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  • Chinese real estate giant Evergrande is on the verge of collapse, with $ 300 billion in debt.
  • The Chinese government is likely to intervene to manage the dismantling of the company, according to experts.
  • Authorities had previously intervened to deal with the collapses of Anbang Insurance, Baoshang Bank and HNA Group.

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The Evergrande debt crisis in China worries investors.

If the real estate developer defaults, it could plunge the world’s second-largest economy – and the rest of the world – into a financial crisis. But experts say the Chinese government is likely to step in to handle the situation, in the shadows or otherwise.

“Evergrande is too important for the Chinese government to ignore,” Warut Promboon, head of credit research at research firm Bondcritic, wrote in a note published last month on the research platform Smartkarma.

To get a feel for how the rest of Evergrande’s debt drama might play out, we took a look at how the Chinese Community Party handled the collapse of three private companies too big to fail over the past five years. .

Anbang has been absorbed by a new government-created entity – which is still trying to sell it

Society: Anbang

Sector:


Car insurance

become a conglomerate

At its peak: Anbang started as a regional auto insurer in 2004, but – thanks to an aggressive debt-fueled buying spree – grew so much in a decade that it managed to take over the famous Waldorf Astoria hotel in New York for around $ 2 billion in 2014.

It was also well connected. Founder Wu Xiaohui was married to a granddaughter of late Chinese leader Deng Xiaoping, who is credited with reforming China’s economy. In 2018, Anbang claimed to have around two trillion Chinese yuan ($ 313 billion) in assets, Reuters reported.

Collapse: The fall of Anbang was rapid and sudden. Wu was taken away by police from his office in 2017. The following year, he was sentenced to 18 years in prison for alleged economic crimes, including fundraising, fraud, and embezzlement.

Government intervention: By the time Wu was sentenced, Chinese regulators had already taken over Anbang and started a state-led restructuring of the technically insolvent insurer.

As part of its restructuring, Anbang’s main insurance and asset management businesses were transferred to a new state-owned company, Dajia, in 2019. Some other assets were sold to raise funds.

Last year, China’s insurance regulator ended its two-year buyout. While in charge, the struggling insurer managed to pay off short- and medium-term financial insurance issued on time and without default, China’s insurance regulator said.

The Chinese government is now trying to sell its stakes in Dajia, which two state investors auctioned off in July. He hasn’t found a taker yet, and for what it’s worth, he’s hanging on to the Waldorf Astoria.

Baoshang Bank underwent government-run restructuring and paid off most of the debt before it was allowed to go bankrupt

Society: Baoshang Bank

Sector: Finance

At its peak: Baoshang was a small, obscure Chinese bank based in Inner Mongolia with the conglomerate Tomorrow Group as its largest shareholder. The bank had assets of 576 billion Chinese yuan ($ 90 billion) in 2017, when it released its latest annual report.

Collapse: In May 2019, the Chinese government suddenly took over the small lender, citing serious credit risks. It was the first foreclosure of a state bank in China in more than two decades, and the move sent shock waves through the country’s banking system. Regulators have said that Tomorrow Group has misused large bank funds illegally.

Government intervention: While Baoshang was a much smaller company than Evergrande or Anbang, Baoshang’s problems sparked global concerns about the bad debts of small lenders in China, the systemic risks among hundreds of these lenders in the country and the effect. domino of a financial crisis of the world’s second largest economy.

As part of a government-led restructuring, part of the assets, liabilities and business of Baoshang Bank were taken over by a newly formed bank – Mengshang Bank – and Huishang Bank, listed in Hong Kong.

Public investors such as a national deposit insurance fund and the Government of Inner Mongolia began the restructuring process, pumping funds into the new entity through a facility that provided


liquidity

.

This paid off 90% of debts owed to major creditors, Reuters reported, citing the People’s Bank of China.. Without the injection of public funds, the average repayment rate of creditors would be less than 60%, according to the central bank.

In August 2020, Baoshang was finally allowed to file for bankruptcy and liquidate its remaining assets. The new Mengshang Bank is still in operation.

HNA Group asked for help and was taken over by the government

Society: HNA Group

Sector: Having started as an airline in 1993 in the Hainan region of southern China, HNA Group has grown into an aggressive negotiator that has won trophies around the world using ultra-free credit available in 2010s. At the end of June 2017, HNA held assets of 1,200 billion Chinese yuan (187.7 billion dollars).

At its peak: Its global acquisitions – worth more than $ 50 billion, according to Reuters – included large stakes in Hilton hotels and Deutsche Bank, as well as luxury properties, including the 245 Park Avenue skyscraper in Manhattan . Many of its acquisitions came at a high price, according to Dealogic in a note.

At its peak, HNA employed 400,000 people worldwide, according to the New York Times.

Collapse: HNA’s debt-fueled acquisitions have started to come under the Chinese government’s microscope. Its outcome was similar to that of Evergrande – through government measures introduced in 2017 aimed at minimizing the risk exposure of domestic private companies.

Government intervention: HNA has come under regulatory scrutiny and the banks that once handled its investments suspended lending to the group, causing a massive cash shortage, in turn affecting HNA’s ability to repay its debts. She started selling assets to raise funds, including stakes in Hilton and Deutsche Bank.

Foreign governments, including the United States, have also scrutinized the deals the company has made, citing concerns such as national security.

HNA has started selling most of its assets unrelated to its original business, claiming that in 2018 it would focus on aviation, logistics and tourism – but the pandemic struck last year, affecting these sectors. This prompted HNA to seek help from the Hainan provincial government, which took over the company. Officials from China’s Civil Aviation Administrator and the Development Bank of China, the country’s main political bank, have also been involved.

HNA went into receivership in February 2021 and last month the company’s creditors voted to approve the company’s restructuring plan involving debt of 1.1 trillion Chinese yuan ($ 172 billion).

It was also divided into four independent units focused on aviation, airport, finance and commerce.

Evergrande will likely go along with HNA Group, bond specialist says

Evergrande, China’s second-largest real estate developer, has $ 300 billion in debt. The Chinese government is likely to handle a controlled implosion of the business, keeping the fallout as minimal as possible, Warut said. Stakeholders have few options.

The Chinese political system gives regulators “a heavy hand that will force collaborations between issuers, investors and intermediaries” who are often owned or influenced by the government, he said.

Chinese authorities have sought to calm nerves over the debt crisis. They publicly berated Evergrande, telling the company to solve its debt problems and ordering real estate developers nationwide to pay off their overseas bondholders.

Evergrande will likely follow HNA’s path, having to sell assets and manage risk step by step, ultimately resulting in “a smaller Evergrande,” Warut told Insider. Going by priority, the whole process is likely to be lengthy and can take years, he added.

Authorities have already asked state-owned companies and state-backed property developers to buy some of Evergrande’s assets, Reuters reported.

He also dropped instructions to Evergrande to contain the fallout. Bloomberg, citing people familiar with the matter, reported that Beijing had asked Evergrande founder and billionaire Hui Ka Yan to use his own money to pay off the company’s debt. It appears to be complying with the directive, pumping out $ 1.1 billion in fire sales of assets, including works of art and two apartments in Hong Kong, to pay off part of the debt.


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