DRIVING THE DAY
1. Kings of outbound investment come under scrutiny
“Irrational and abnormal.”
That was the comment from China’s chief foreign exchange regulator, Pan Gongsheng, in March 2017. He was describing the previous year’s outbound investment climate. Now the regulators are going after some of the worst offenders.
The truth is that the regulators have been building up to this for months. Inspections of these companies started in early June, but officials are now specifically asking banks about overseas loan exposure to five companies:
- Anbang Insurance Group Co.,
- HNA Group,
- Fosun Group,
- Wanda Group, and
- the unit of Sino-Europe Sports Investment Management Changxing Co. that recently acquired Italy’s AC Milan soccer team.
Company stocks tanked Thursday — both for the companies themselves and their related entities listed in Hong Kong and on the Mainland.
What’s going on? These companies have all made recent overseas investments in the sports, entertainment and leisure industries. The authorities don’t like that. In March, PBoC Governor Zhou Xiaochuan explicitly stated that such acquisitions have no “national benefit”.
Don’t forget: 2016 was a record year for outbound investment. But it was also a record year for the government’s termination of outbound deals. That shows things were getting silly (Caixin):
- “Regulators had vowed to curb “irrational” deals…In 2016, China terminated more than $70 billion worth of overseas deals, up from $10 billion canceled in 2015.”
The scuttlebutt: It’s tempting to read this as political score settling ahead of the Party Congress. These companies are all headed by well known, and often flamboyant, Chinese billionaires who are politically connected. But given the murky ownership structures and China’s inscrutable web of elite family interests, no one really knows where political loyalties lie.
The juice: That means fortunes can suddenly turn for people who everyone assumed were politically protected — like Anbang Chairman Wu Xiaohui who is now in detention.
The reality: China is still trying to get a handle on outbound capital flows. These moves have been in motion since late 2016 when regulators began intensifying scrutiny of any major deal abroad.
Why it matters: It’s smart policy to try to understand just how systemic these firms may be and how much exposure the banking system has to them. Regulators are concerned that if they start pulling on strings too hard, the financial system could start to unravel.
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Caixin: 独家丨监管摸底海外并购明星风险 企业忙澄清
Caixin: China Asks Banks to Assess Credit Risks Linked to Firms Active in Overseas Deals
Bloomberg: China’s Dealmaking Tycoons Scrutinized by Banking Regulator
FINANCE AND ECONOMICS
2. The Party Congress raises risk for equity prices
Think ideological tightening in China is only a social issue? It’s also a business risk.
A perfect example: Yesterday, Weibo’s US-listed equity prices crashed.
What happened? Weibo’s stock price dropped by over 6% and its parent company SINA fell by almost 5%.
The Trigger? China’s censor — the State Administration of Press, Publication, Radio, Film and Television — dropped a bombshell before market open. It suddenly shut down all video streaming reposted on the platform (see notice below). That’s not exactly helpful for a media company.
Why now: You can thank Xi Jinping and the upcoming Party Congress. Censors are out in force clamping down on platforms that transmit any content that makes the Party uneasy. That’s not exactly a fine-tuned measure, so blunt tactics like this are often employed.
The bigger picture: The Party wants to monopolize narratives on politics and current affairs. Keep an eye on any company that dabbles in that space.
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36 Kr: 微博深夜回应整改：用户上传非节目类视频不受影响
FINANCE AND ECONOMICS
3. Distressed debt investment continues to heat up
Yesterday,we flagged that the Big Four banks are quietly accelerating debt write-downs.
Today, we see that prices for bad debt in China are up 30%, largely off of increased demand from distressed debt investors (Bloomberg below).
The takeaway: Interest in this asset class will only increase as China works through its debt issues.
What to watch: Integral to any large scale debt work out process will be China’s local AMCs, so they are worth getting to know (Bloomberg again):
- “More than 20 Chinese local-government asset management companies have been established in the past year to deal with regional bad debt.”
- “There are now over 40 local AMCs in China, on top of the four state-owned ones.”
The bigger context: Yesterday we argued that foreign capital will only be welcome as long as China needs it as a means to a specific national end. Dealing with distressed debt is right in that wheelhouse. It will be a national priority in coming years as China cleans up its banks, so it’s going to be a very appealing place to play.
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Bloomberg: China Bad Debt Prices Up 30% as New Gold Rush Gets Under Way
POLITICS AND POLICY
4. Xi takes a victory lap in Shanxi
Xi Jinping is on the road again.
He just took a trip to Shanxi. It was his first visit as Party Secretary.
The itinerary: Xi used the trip to highlight two of his pet projects – poverty alleviation and promoting the Party’s revolutionary heritage. He skipped the provincial capital, Taiyuan, and flew straight to Lvliang, where he visited a nearby revolutionary museum and met with old revolutionaries.
Get smart: Xi has tirelessly tried to remind cadres and the Chinese people of the CCP’s revolutionary heritage. That bolsters the Party’s image. And as the son of a revolutionary, it bolsters Xi’s personal brand.
Some context: Shanxi has been ground zero for the anti-corruption campaign, with over 100 provincial officials detained. Xi’s visit signals that the initial phase of the campaign has been successful.
What’s next: Anti-corruption 2.0. Shanxi is one of three trial provinces for the new supervision commission. The goal is to regularize the campaign in Xi’s second term.
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CPC: 习近平：请乡亲们同党中央一起，撸起袖子加油干!
POLITICS AND POLICY
5. We’ve got a Wang Qishan sighting!
Wang Qishan — head of the Party’s discipline unit — has not appeared in public since May 13.
When top leaders go quiet, people start to wonder why, and many Sinophiles were speculating that he may have been infirm.
Wang has dispelled the growing rumors with a trip to Guizhou this week.
Get smart: The truth is that Wang rarely makes public appearances. This was not the first time that he has been “missing” for several weeks.
Why does this trip matter? Wherever Wang pops up, people get nervous. When other top officials visit a province, it is seen as a sign of support for the local leadership. Not so with Wang Qishan. As the Party’s discipline enforcer, his visits are usually seen as the prelude to a crackdown on local leadership.
But this visit looks different: Guizhou Party Secretary Chen Min’er (circled) is Xi Jinping’s man, and a dark horse candidate to be Xi’s successor as General Secretary. We read Wang’s visit as a show of support for Chen. That’s in large part because Wang visited Chen’s high profile pet project – the Guiyang Big Data Center.
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CPC: 王岐山：当好党内政治生态“护林员” 以新面貌新气象迎接十九大
POLITICS AND POLICY
6. Rule by law
China’s legislative agenda, and process, are more transparent and important than you may think.
The leadership body of China’s legislature — the National People’s Congress Standing Committee (NPCSC) — is in the middle of its bimonthly legislative session. The excellent NPC Observer has the skinny:
- A draft Supervision Law (监察法) has been submitted to the NPCSC.
- The NPCSC is scheduled to hear an explanation of the draft on Friday.
- The NPC Law Committee has recommended that the NPCSC pass the National Intelligence Law and the amendment to the Water Pollution Prevention and Control Law.
- Both laws are expected to be approved on July 27, the last day of the Session.
Why it matters: The Supervision Law is the legislative priority for 2017-2018. It will lay the legal framework for a new National Supervision Commission, and serve to regularize the anti-corruption campaign.
The bigger picture: The NPC is often derided as a rubber stamp. In reality, it’s never been more important. Xi Jinping LOVES laws – and order more generally. Understanding the legislative agenda is important for tracking the progress of Xi’s overall policy program.
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NPC Observer: 十二届全国人大常委会第二十八次会议在京举行