Tuesday, March 22, 2016

The great Chinese "cash out"?

The Governor of the People's Bank of China (PBoC) has expressed concern about the rising Chinese corporate indebtedness, now at 160% of GDP. Corporate weakness has been rising alarmingly in recent months,
Data from the 1,627 domestically listed companies, or 58 per cent of the total, that have reported their 2015 earnings show a clear deterioration in fortunes. Average operating revenues per share fell to their lowest level so far this decade, sliding to Rmb5.4 from Rmb6.55 in 2014... In addition, just over one-fifth of listed Chinese companies reported negative cash flows during 2015 and about one-third owed at least three times as much in debts as they owned in assets.
The Governor's statement follows a week after the little known and reclusive Chinese private insurer with deep political connections, Anbang Insurance, made audacious $13 bn and $6.5 bn all-cash offers to purchase Starwood Hotels & Resorts and Strategic Hotels & Resorts. This takes the total volume of Anbang's foreign purchases to $32 bn in the last 18 months. 

Such aggressive deal-making, most often through all-cash transactions, have taken overseas spending by Chinese investors to $102 bn, just shy of the $106 bn record for all of last year. Data from the 54 overseas deals last year show that may of these transactions are "highly leveraged". This has also stretched Chinese banks, whose NPAs have risen to 1.3 trillion renminbi, itself most likely a heavy underestimate. 
Anbang's rise is symptomatic of rising corporate indebtedness and foreign deal making. For a firm which has never published an audited financial statement, does not divulge its owners or even executives, and does not disclose the business cases for its various investments, Anbang has been wildly successful in raising cash for such transactions. The all-cash offers are a way around the disclosure requirements and may reflect either lack of desirable level of assets or reluctance to disclose asset ownership. It also allows these firms to move at amazing speed in taking decisions and closing deals. 

The FT has this story which argues that the foreign deal making is motivated by a desire by the country's high net worth individuals to move away from renminbi-based assets and diversify their income sources into foreign currency denominated cash flows, 
A broader concern about China Inc’s acquisition spree stems from questions about why it is happening. Is it being driven by strength, or is it a reflection of the waning vigour of heavily indebted corporations in a slowing domestic market? To a significant degree, analysts say, the exodus of Chinese investment capital is in fact a “quest for cash flow”... the ample cheap credit available under Beijing’s loose monetary policies allows companies with good banking relationships to spend heavily overseas as a way to diversify away from their dwindling earnings at home.
But hedging against a slump in renminbi may not be the full story. Such purchases are also motivated by the emergence of the global Chinese consumer and strategic thinking,
Many of their investments are linked to the emergence of the global Chinese consumer. In residential real estate, Shanghai-based Greenland Group bought a majority stake in the Atlantic Yards development in Brooklyn, promising to help sell units to wealthy Chinese immigrants and investors. Part of the project has been renamed Pacific Park. Dalian Wanda, owned by China’s richest man, Wang Jianlin, has similar plans for its projects in Madrid, Australia’s Gold Coast, Chicago and Beverly Hills in Los Angeles.
In other cases, the motivation is to acquire foreign technology. China’s leaders have long said that they want national champions to move up the value chain, especially in basic commodity industries suffering from overcapacity, which has cut profit margins to the bone. Many of these deals are too small to grab headlines. In 2014, state-owned China National Building Materials acquired Avancis, a German manufacturer of advanced materials used in solar panels. This year’s $43bn bid by ChemChina, a large state-owned enterprise, for Syngenta, the Swiss agribusiness, was driven mainly by the Swiss company’s biotechnology and agrochemcial prowess.

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