The announcement on Thursday of China’s probe into the “systemic risk of some large enterprises” that have gone on blistering overseas acquisition sprees represents a significant shift in Beijing’s commercial engagement with the west.
The probe into the funding by Chinese banks of large private companies, which sources said included Dalian Wanda Group, HNA Group, Fosun International Inc and Anbang Insurance Group, reveals that a domestic crackdown on financial shenanigans has spread to the standard bearers of China’s outward embrace.
“This is a thorough investigation into large groups with overseas investment exposure in order to prevent a ‘Lehman Brothers moment’ happening to the Chinese financial system,” said Frederic Cho, founder of Frederic Cho Advisory, a specialist China investment consultancy.
The nightmare scenario for China, analysts said, was that one or more of the big private companies under investigation may suffer a financial failure that imperils the survival of the overseas companies they have bought, thus inflicting hefty reputational damage upon China Inc.
The fact that the probe was announced in public on Thursday by Liu Zhiqiang, deputy director of the China Banking Regulatory Commission, shows the strong level of intent behind the investigation, according to a Chinese banker, who declined to be identified.
Mr Cho identifies a cohort of reform-minded Chinese officials - including Guo Shuqing, chairman of the CBRC - as determined to clean up China’s financial system. These “heirs of Zhu Rongji”, the former hard-driving reformist premier, are motivated by a desire to prevent China from acquiring a “wild east” reputation.
“They are obsessed with not being seen as a ‘rogue nation’, but a modern and advanced nation playing in the big league of nations. The preference is to be much more regulated than the wild west, or wild east in this case,” Mr Cho added.
The international collateral damage of any failure among the companies under investigation could be considerable. Anbang, for instance, has completed more than a dozen deals around the world since October 2014 worth $17bn. These include the iconic Waldorf Astoria Hotel in New York and other large companies.
Wu Xiaohui, chairman of Anbang Insurance Group, was detained this month as anti-corruption authorities started to comb through his company’s books. Attention has focused on the possible link between Anbang’s puzzling business model at home and its ability to splash out on companies abroad. In particular, the question of how Anbang was able to boost its group annual insurance premium income from Rmb26bn in 2013 to Rmb504bn last year - an increase of more than 19 times - has raised eyebrows. Mr Wu’s detention coincides with China’s comprehensive crackdown into a vast netherworld of shadow finance.
At this stage, it is unclear how the investigations may proceed, but the official determination behind them is real. Not only has Mr Guo’s office issued eight documents since February setting out a vision for rehabilitating the financial sector, he has also referred to his task in the strongest possible terms.
“If the banking industry becomes a complete mess, as the chairman of the China Regulatory Commission, I will resign!” Mr Guo was quoted as saying by Caixin, a respected Chinese publication, earlier this year.
Nevertheless, there are also countervailing pressures. Andrew Collier, managing director of Orient Capital Research in Hong Kong, said that although authorities realise the dangers inherent in a vast, unregulated shadow finance sector, they are also to some extent dependent on it. “The leaders know that shadow banking is a risky gamble but they are also addicted to the capital that helps to prop up both GDP growth and ailing local governments.”
