BEIJING – China has stepped up campaign to tame its spendthrift and indebted companies, as authorities punish CEOs of two struggling companies while letting a struggling real estate giant continue to struggle under the weight of more $ 300 billion in debt.
Chinese authorities have taken into custody the two main executives of HNA Group, a transport and logistics conglomerate that bought out companies around the world before quickly collapsing under heavy debt. The company said Friday evening that police in Hainan Province, where it is based, arrested its chairman, Chen Feng, and general manager, Tan Xiangdong.
The two men were detained “in accordance with the law for suspected offenses,” the company said in a statement, without specifying the offenses. HNA did not immediately respond to requests for comment.
The announcement came on the same day that the state-run Xinhua News Agency said that Yuan Renguo, the former chairman of the Kweichow Moutai Group, which produces a high-end Chinese liquor often consumed by the business class, was sentenced to life imprisonment for accepting more than $ 17 million in bribes.
These sanctions take place against a larger backdrop of pressure on the practices of companies that the Chinese Communist Party increasingly sees as dangerous to the economy and its own hold on power. They came as global investors await the fate of another struggling Chinese giant, China Evergrande Group.
Evergrande, which is struggling with over $ 300 billion in debt, is widely seen as at risk of defaulting on its obligations. It is not yet clear whether he made a payment on $ 83 million in foreign debt that was due Thursday, causing his share price to fall sharply again on Friday.
Serious unrest at HNA and Evergrande is taking place against the backdrop of sweeping Beijing measures that leave the country’s once-free private sector feeling increasingly under siege.
Xi Jinping, the country’s top leader, has ordered companies to pay more attention to the government. Legislation approved two years ago requires domestic and foreign companies to share detailed information about their operations in China with the government. All domestic and foreign companies, except the smallest, must now have Communist Party cells.
The government has severely cracked down on the tech industry this year. China on Friday tightened its restrictions on cryptocurrencies, calling all financial transactions that involve them illegal and banning them nationwide. Anti-monopoly measures are transforming online retailing. And days after car calling service Didi Chuxing made an initial public offering in New York at the end of June, Chinese regulators pulled its apps from app stores and suspended new user registrations.
In recent weeks, the Communist Party has responded to public concerns about rising income inequality by reorienting its economic policy. A goal of “common prosperity” began to supplant an earlier tolerance for a private sector that grew rapidly but sometimes borrowed recklessly.
HNA has become a symbol of the dizzying rise and rampant spending of the first wave of Chinese private conglomerates with strong political backing. It acquired significant stakes in Hilton hotels, Deutsche Bank, Virgin Australia and other companies, and at its peak employed 400,000 people worldwide.
HNA signed 123 agreements in three years, only to start encountering problems in 2017 to repay debt incurred to pay for its acquisitions.
Mr. Chen’s co-chair, Wang Jian, died in 2018 when he fell from a wall during a sightseeing visit while on a business trip to France. The death was deemed accidental.
Business and Economy
HNA, Evergrande, and other large Chinese private companies that have grown rapidly to deal with financial collapse in recent years are often referred to in China as gray rhinos. The term refers to obvious dangers that are ignored until they suddenly become very dangerous and have been taken up by Chinese authorities.
The threat posed by Evergrande could be the greatest to date to the country’s traditional business model. He borrowed and spent for years, taking the business to huge sales even as its debt grew. Today, rating agencies and investors consider it to be at serious risk of default, disrupting global markets due to its size.
Its shares fell nearly 12% on Friday as Thursday’s interest payment deadline passed without a word from the company on whether it had honored its commitments.
A bondholder, speaking on condition of anonymity to discuss the matter, said on Thursday that the company had failed to make the payment. But this default did not necessarily put the company in default. The company’s covenants give it a 30-day grace period before the missed payment results in default, the person said, meaning debt holders could face a month in limbo.
The concern extends to landowners and policymakers in China who would face the fallout from a possible default. A constant stream of negative news from Evergrande has caused panic in the markets and raised fears of possible economic contagion – including outside China – if the company goes bankrupt.
Unable to sell part of his business sprawl or raise new money from the sale of new properties, Evergrande also faces angry suppliers, homebuyers and employees, some of whom have protested and claimed their money.
Tensions in global financial markets have eased more recently, in part thanks to Chinese authorities’ intervention to boost confidence, including injecting billions of dollars in capital into the country’s banking system. Several bank executives and central bank officials outside of China have also said the impact on institutions in the United States and Europe is expected to be minimal.
On another key question for investors, whether China will directly bail out Evergrande, Beijing has been silent so far while stressing that no Chinese company is too big to fail.
This helped Evergrande say on Wednesday that it had reached an agreement with investors on a different payment due for mainland Chinese bondholders.
Given this development, Houze Song, a researcher at the Paulson Institute in Chicago, said Evergrande would likely end up paying Thursday’s interest. He said the bondholders and Evergrande could potentially strike a short-term deal involving the debt holders losing some of their exposure to Evergrande.
The fate of Evergrande and what its failure could mean for the Chinese economy has divided some of the world’s best-known investors. Billionaire investor George Soros recently claimed that a collapse of Evergrande would trigger a wider economic crash, while another billionaire investor, Ray Dalio, argued this week that an Evergrande fault was “manageable”.
Investors in dollar-denominated debt include Swiss bank UBS, asset manager BlackRock, UK bank HSBC Holdings, as well as a number of hedge funds. The bonds are linked to various private and public companies that are part of Evergrande but separate from its main real estate business, including an electric vehicle division. These companies could still be valuable even if the real estate industry collapses.
Despite the lingering uncertainty, equity investors appear to be expecting a better outcome from the Evergrande debacle than they did earlier in the week. On Wall Street, the S&P 500 closed more than 1% higher on Thursday, recouping its steep losses from the start of the week – in part because the executives of two of Evergrande’s creditors downplayed the risk.
Ralph Hamers, Managing Director of UBS, noted at an investor conference Thursday that the bank’s direct exposure to Evergrande was “intangible”, adding that its problems “didn’t keep me from sleeping at night,” according to a transcript from software company Sentieo .
Noel Quinn, chief executive of HSBC, admitted at the same conference that the challenges of Evergrande could seep further into the equity and credit markets.
“I would be naive to think that market turmoil does not have the potential to have a second and third order impact,” he said, calling Evergrande’s situation “concerning”.
A representative for BlackRock declined to comment.
Central bankers outside of China also downplayed the risk this week. Federal Reserve Chairman Jerome H. Powell on Wednesday called Evergrande’s problems “peculiar to China” during a press briefing, and on Thursday, Sam Woods, vice-governor of the Bank of England, told Reuters that the exposure of British banks and insurance companies to Evergrande was “not significant”.
Cao Li research and contribution Alexandra Stevenson and Lauren Hirsch contributed reports.