People pedal past a building shaped as a Chinese ancient coin on April 21, 2007 in Shenyang of Liaoning Province, China. (China Photos/Getty Images)People pedal past a building shaped as a Chinese ancient coin on April 21, 2007 in Shenyang of Liaoning Province, China. (China Photos/Getty Images)

After a record amount of capital outflows from China in 2016, Beijing is looking to reverse course this year.

Chinese authorities’ efforts to restrict capital outflows appear to be working. Foreign exchange reserves rose for four consecutive months through May, as inflows finally exceeded outflows. Outbound direct investment dropped almost 46 percent during the first six months of 2017 compared to the same period last year, according to official data.

Beijing is using a multipronged approach to stem the money flow. Regulators have restricted fundraising activities of insurance companies, a main source of recent foreign acquisitions. The China Banking Regulatory Commission (CBRC) in late June asked banks to check their exposure to several conglomerates with activities abroad, including the Dalian Wanda Group. And most recently, regulators are applying stricter standards before approving foreign investments and using state-controlled media to root out offenders.

China is especially targeting so-called “asset transfers,” or purchases of foreign assets with little to no potential economic returns. Such purchases, regulators believe, are purely used to shift or launder funds abroad.

“China will continue to encourage only genuine and rule-abiding outbound investments by financially competent companies,” said Wang Chunying, a spokesperson at the State Administration of Foreign Exchange (SAFE), according to Caixin, a mainland business magazine. SAFE is China’s foreign-exchange regulator.

Reading between the lines, it’s clear that regulators believe some recent high-profile foreign acquisitions were backed by dubious financing, and the quality of such assets raises questions.

Leveraging Media

Beijing has also utilized the state-controlled media to step up criticism of the recent string of high-profile overseas acquisitions by Chinese companies, where academic and business experts publicly question the motivation behind such deals.

During a July 18 segment shown on state-owned China Central Television (CCTV), the host asked why a little-known Chinese appliance retailer would buy the Italian soccer club Internazionale, also known as Inter Milan, given that the company had been losing money for the last five years.

“Some companies are already highly indebted at home, yet they spend lavishly with bank loans abroad. … I think many overseas acquisition deals have a low chance of generating cash flow, and I cannot exclude the possibility of money laundering,” said Yin Zhongli, a researcher with the Chinese Academy of Social Sciences, during the CCTV segment, according to the South China Morning Post. The Chinese Academy of Social Sciences is a think tank affiliated with the State Council, China’s cabinet.

Publicly traded shares of Suning, the appliance retailer that bought Inter Milan, immediately fell intraday following the CCTV segment. Yin Zhongli, the academic researcher, later clarified that he did not intend to call out Suning in particular, but was commenting in general about Chinese firms buying assets abroad.

I cannot exclude the possibility of money laundering.

— Yin Zhongli, researcher, Chinese Academy of Social Sciences

Curbing Dealmakers

SAFE spokeswoman Wang said the regulator would focus its attention on cross-border deals in real estate, hotels, entertainment, cinemas, and sports clubs.

The industries cited by SAFE are not coincidental—such companies were main targets of China’s dealmakers during the recent acquisition frenzy.

China’s banking regulator recently asked banks to look into their exposures to several Chinese conglomerates, including Anbang Insurance Group Co., Dalian Wanda Group Co., HNA Group Co., Fosun International Ltd., and Rossoneri Sport Investment Lux, which acquired Italy’s AC Milan soccer team in April.

Foreign real estate and hotels are frequent targets of insurer Anbang and conglomerate HNA, while Hollywood movie studios and cinemas have received heavy investment from commercial developer Wanda.

Ownership of foreign sports clubs has also drawn Chinese regulatory scrutiny. Rossoneri’s original proposal to buy AC Milan almost fell apart after it was postponed several times, due to Beijing’s refusal to sign off on certain funds leaving China. The deal finally concluded in April after billionaire investor Paul Singer’s hedge fund Elliott Management stepped in to provide partial financing. Besides the two Italian clubs, Chinese companies also have ownership stakes in English club Aston Villa, Spanish club Atletico Madrid, and French club OGC Nice.

HNA may be finding itself shunned by leading Wall Street banks and advisers.

Anbang chairman Wu Xiaohui was detained by Chinese authorities in June. Anbang had been one of the most active foreign dealmakers over the last three years. It owns the Waldorf Astoria hotel in Midtown Manhattan—currently closed for renovation—and Chicago-based Strategic Hotels & Resorts. In 2016, Anbang famously launched a failed bid to acquire Starwood Hotels & Resorts Worldwide.

Wu is believed to be a close ally of an influential political faction, led by former Party leader Jiang Zemin, that is in opposition to the Xi leadership. Jiang was head of the CCP for more than a dozen years (1989–2002) and continued holding sway over the Chinese regime through a network of cronies for another 10 years (2002–2012). Since entering office in 2012, Xi has waged a battle to uproot the influence of Jiang and his faction.

Sources close to Zhongnanhai, the central headquarters of the CCP, told The Epoch Times in June that Wu is one of the key “white gloves,” or money launderers, for the Jiang political faction and the family of Zeng Qinghong, the former Chinese vice premier and longtime Jiang confidant.

HNA and U.S. Banks

Another active foreign acquirer, HNA may be finding itself shunned by leading Wall Street banks and advisers.

Last week, Bank of America Corp. told its bankers to stop working with HNA Group and its affiliated entities on future transactions, due to concerns about the group’s debt levels and opaque ownership structure, according to a Bloomberg report. The report also stated that other banks, including Morgan Stanley and Citigroup Inc., gave similar directives to their staff.

A source at a major Wall Street bank confirmed the Bloomberg report.

Currently, HNA is closing on the purchase of a majority stake into hedge fund SkyBridge Capital LLC. SkyBridge’s founder and co-managing partner is Anthony Scaramucci, President Donald Trump’s new communications director.

Approvals are required from banks’ compliance departments before bankers can conduct business with potential clients, a process known as KYC (know your client), which scrutinizes a potential client’s credit-worthiness, track record, and ownership. Citigroup and Morgan Stanley struggled to obtain sufficient clarity on HNA’s sources of funding and its ownership structure, according to the report.

Similar to other Chinese conglomerates, HNA has a Hong Kong publicly listed arm, HNA Holding Group Co. Ltd., which is owned by a parent company with obscure ownership identities.

HNA’s ultimate structure is a complex web of investment trusts, provincial and local government agencies, and small-business ventures.

Thirteen individuals ultimately control 76 percent of the company through intermediary companies. Chen Feng, the public face of the company, controls 15 percent of HNA and has connections with former presidential candidate Jeb Bush and American investor George Soros. HNA’s biggest owner, Guan Jun (with a 29 percent stake), doesn’t work for the company and is a relative unknown. Listed addresses for Guan through various public filings and records include a side street beauty salon in western Beijing, a shabby Beijing office building, and a nondescript apartment building in southwest Beijing, according to the Financial Times.

HNA is also highly indebted. At the end of 2014, HNA had a combined debt of 196.9 billion yuan ($29.5 billion) on its balance sheet, compared to only 73.2 billion yuan ($10.9 billion) of equity, according to prospectuses filed with the Irish securities regulators in connection with a 2015 $1 billion bond offering of one of its subsidiaries.

While actions of individual U.S. banks may have little to do with Chinese politics or regulatory desires, the path forward for Chinese companies looking to acquire foreign assets is becoming more and more difficult.

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July 20, 2017

Chinese workers at a pier in Qingdao, China, on April 13. The Belt and Road Initiative is supposed to boost trade both by land and by sea. (STR/AFP/GETTY IMAGES)Chinese workers at a pier in Qingdao, China, on April 13. The Belt and Road Initiative is supposed to boost trade both by land and by sea. (STR/AFP/GETTY IMAGES)

The idea, at first, sounded good: Plow trillions of dollars into infrastructure projects in the barren wasteland that is most of central Asia, and trade will start to bloom, economies will prosper, and peace will reign. However, most experts believe real world problems will result in the whole idea turning into nothing but a pipe dream.

(VCG/VCG VIA GETTY IMAGES)

(VCG/VCG VIA GETTY IMAGES)

The concept is called the Belt and Road Initiative (BRI), also known as One Belt, One Road, launched by Chinese regime leader Xi Jinping in March 2015. It has two elements: one landlocked route from China to Europe through Asia, called the Silk Road Economic Belt, and one seaborne route going from China to Europe past India and Africa, called the Maritime Silk Road.

Although estimates vary, China has called for up to $5 trillion in infrastructure investments over the next five years in the 65 countries along these routes. Ports in Sri Lanka, railways in Thailand, and massive roads and power plants in Pakistan are just a few examples of the planned investments.

Speaking at the Belt and Road Forum in Beijing in May this year, Xi said: “In pursuing the Belt and Road Initiative, we should focus on the fundamental issue of development, release the growth potential of various countries, and achieve economic integration and interconnected development, and deliver benefits to all.”

His statement sums up the problems with the multitrillion dollar project: It talks about desirable outcomes but is exceedingly vague on the details. This is just like the BRI’s official plans. They call for improving intergovernmental communication, coordinating infrastructure plans, developing soft infrastructure, and strengthening tourism and trade, but the specifics are shaded over.

“There are no concrete action items set out in the Chinese government’s action plan for what has become one of Xi’s most visible policy initiatives. The document contains a number of generic proposals interspersed with platitudes about cooperation and understanding,” research firm Geopolitical Futures states in a July report.

But despite the lack of concrete programs, the vast sums involved show that the BRI has garnered support from many countries. China-led institutions, like the Asian Infrastructure and Investment Bank, have also pledged $269 billion dollars for the project. Even Japanese Prime Minister Shinzo Abe voiced his support at the recent G20 meeting in Hamburg, Germany.

It is completely overhyped. The numbers they published, $4 trillion to $5 trillion, they are completely unrealistic.

— Christopher Balding, professor of economics, Peking University

Objectives Measured Against Reality

China’s objectives, explicit and implicit, need to be measured against reality. On this account, most experts think the project is not economically viable—but it will allow China to gain political influence.

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“It is completely overhyped. The numbers they published, $4 trillion to $5 trillion, they are completely unrealistic,” said Christopher Balding, professor of economics at Peking University.

Economically, it is mostly about investment and exports. “China has surplus capital and excess productive capacity, which is motivating this set of initiatives. With a high savings rate in China and a slowdown in industrial investment at home, they are looking for overseas projects that can be financed and a new outlet for Chinese exports,” said James Nolt, professor of international relations at New York University.

The result is the BRI, which would see China team up with countries along the routes to raise money for building infrastructure to facilitate trade. And Chinese companies would do the construction.

The Chinese Overseas Ports Holding Company has expanded the Gwadar Port in Pakistan and has an operating lease until 2059. This is just the first, small step in connecting the Silk Road Economic Belt with the Maritime Silk Road. Highways, pipelines, power plants, optical connections, and railways are planned for the China–Pakistan Economic Corridor, with a total investment of $62 billion.

Of course, local and international companies are going to bid for these projects as well, but with China providing most of the funds, Chinese state owned enterprises (SOEs) will get most of the contracts.

If Chinese companies got $5 trillion in contracts, this would indeed boost exports, but there are several problems with this notion even in theory.

First, infrastructure projects are very resource intensive, and with few exceptions China simply doesn’t produce commodities. Much of the value-added, therefore, will be absorbed by international commodity producers like Australia (though the Chinese steel industry will certainly get a boost).

Impossible to Finance

Then there is the question of financing these investments. The countries where the investments are going to take place, like Pakistan and Cambodia, don’t have the money to spend trillions and also can’t raise it in international financial markets. This leaves China to come up with a way to get the hard currency financing to achieve its economic goals.

At the beginning of the BRI, China still had almost $4 trillion in foreign exchange reserves, and it was looking to diversify. These have dropped to $3 trillion in 2017, a threshold the central planners in Beijing have made clear they will not cross.

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“They have to tap international bond markets for that money, or they have to exhaust their foreign exchange reserves and even then go out and borrow. Even by global bond market standards, a $5 trillion bond sales program spread out over a couple of years is an enormous number. They are not going to shoulder that type of repayment risk and they are not going to deplete their reserves,” said Balding.

Research by investment bank Natixis estimates that such a borrowing binge would increase Chinese external debt from 12 percent to 50 percent of GDP. This would expose the country to exchange rate risks and put it in the same vulnerable position that the Asian tiger economies were in during the financial crisis of 1998.

Loans from China denominated in yuan from Chinese banks are not an option for two reasons. This “poses its own risks to the overly stretched balance sheets of Chinese banks. In fact, their doubtful loans have done nothing but increase during the last few years, which is eating up the banks’ room to lend further,” especially for risky projects, wrote Natixis Chief Economist for the Asia Pacific Alicia García-Herrero, in a blog post.

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In addition, recipient countries could only pay back a loan in yuan by selling goods and services to China, thus procuring the Chinese currency. This would be directly counterproductive to the goal of promoting exports from China with construction contracts and eventually through improved trade infrastructure.

“How is Pakistan to repay a yuan loan? They are going to generate a trade surplus in yuan. So China has to run a trade deficit with all the countries it lends to. Even if they don’t do that, Pakistan is going to have to generate some type of trade surplus with another country to have enough capital to pay back China,” said Balding.

Given that most of the infrastructure will be built to facilitate trade with China, this is highly unlikely. So in the end, China will be left to vendor finance these projects. The only way to achieve its economic objectives will be hard currency loans that are completely repaid, with interest—which China currently has no clear means of financing.

Bad Risks

All of the economic indicators regarding the most prominent BRI projects point against this repayment scenario.

There is a reason countries like Cambodia, Laos, Thailand, Pakistan, and Mongolia don’t have good infrastructure. They have a generally poor macroeconomic framework, underdeveloped institutions, and a high degree of corruption. Building roads and railways will not change that.

Additionally, “Central Asia, a patchwork of states whose borders were drawn to make the countries more easily controlled from Moscow during the Soviet era, is hardly a promising market for Chinese goods,” states the Geopolitical Futures report.

“People talk about [the BRI] as if China is giving away money. In almost every case, it’s the Chinese credit card company giving a credit card to a despotic dictator, like in Sri Lanka or Venezuela. None of that has ended well,” said Balding.

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The nature of the value proposition of the BRI leads to the worst countries needing the most infrastructure and the most financing. Economically stable and healthy countries like Malaysia and Vietnam need less investment than troubled states like the Kyrgyz Republic and civil war-torn Ukraine. These countries have an economic health ranking of 44 and 38.2, respectively, compared to Malaysia’s 66.8, according to a ranking by Oxford Economics.

“Where financial development is relatively weak and governments are heavily indebted, BRI financing will be crucial,” states the report by Oxford Economics. It is precisely these places that offer the lowest chance of repayment.

“While a new airport or railway can be built in just a few years, amassing the human and institutional capital needed for them to operate efficiently and contribute to economic and social progress is a slower process,” states a report by research firm TS Lombard.

Small Scope

Given the constraints in viable economic projects as well as available financing, the scope of the BRI will likely remain small, while China can still focus on its political objective to exert greater influence over the participating countries.

“What this leaves us with is a much more modest program of $15 billion to $30 billion a year,” commensurate with the $269 billion already pledged by the China-led institutions, Balding said. “I don’t want to say that it’s irrelevant, but it is irrelevant. The United States is spending $300 billion in direct investment every year overseas.”

One of the initiatives that makes sense but needs little infrastructure and investment is protecting ships from pirates. “The cooperation with Singapore to keep the sea-lanes safe is promising, and that would have happened either way,” said Nolt.

While Chinese propaganda is touting that the BRI will revive the spirit of the ancient Silk Road through central Asia to Europe, it may have missed the boat on that one.

Given advances in shipping technology, it is far easier and cheaper to transport goods by ship rather than by land. That’s why most of China’s and the world’s trade (80 percent) is done by sea.

In the end, keeping out pirates and building a few ports in Pakistan and East Africa is a worthwhile endeavor—but it’s one that falls far short of building trillions worth of landlocked infrastructure.

“The Silk Road was a constantly evolving marketplace that moved goods across a vast continent where they could be exchanged for other goods. And unlike today, Eurasia was the center of world civilization, home to the most important economies,” states the Geopolitical Futures report.

Today, the most important economy, also for China, is the United States, and it is best reached by sea through the Pacific Ocean, far away from the Maritime Silk Road and the One Belt.

CHINESE INFRASTRUCTURE PROJECTS IN ASIA

BOATS AT THE GWADAR PORT IN PAKISTAN ON THE ARABIAN SEA. China Overseas Ports Holding Company is leasing the port until 2059 and has already started expanding it. China has been looking to secure sea trading lanes along the so-called Maritime Silk Road, and the Pakistani port is an important piece in the puzzle. (J. PATRICK FISCHER/CC BY-SA)

BOATS AT THE GWADAR PORT IN PAKISTAN ON THE ARABIAN SEA. China Overseas Ports Holding Company is leasing the port until 2059 and has already started expanding it. China has been looking to secure sea trading lanes along the so-called Maritime Silk Road, and the Pakistani port is an important piece in the puzzle. (J. PATRICK FISCHER/CC BY-SA)

A SKY TRAIN IN BANGKOK ON MARCH 20, 2013. Thailand will borrow a total of $69.5 billion to fund high-speed railways and other transportation mega projects, with most of the money coming from China and Chinese companies providing the construction. Thailand's railways will form part of the Kunming– Singapore railway system. However, Thailand will repay the loans with rice and rubber exports, thus running a trade surplus with China and going against the objective to generate export growth. (NICOLAS ASFOURI/AFP/GETTY IMAGES)

A SKY TRAIN IN BANGKOK ON MARCH 20, 2013. Thailand will borrow a total of $69.5 billion to fund high-speed railways and other transportation mega projects, with most of the money coming from China and Chinese companies providing the construction. Thailand’s railways will form part of the Kunming– Singapore railway system. However, Thailand will repay the loans with rice and rubber exports, thus running a trade surplus with China and going against the objective to generate export growth. (NICOLAS ASFOURI/AFP/GETTY IMAGES)

THE BANKS OF THE IRRAWADDY RIVER IN BURMA ON OCT. 2, 2015. Although not officially part of the Belt and Road Initiative, the $3.6 billion Myitsone Dam project is an example of a Chinese infrastructure project in a very poor country that hasn't gone as planned. Construction has been suspended for six years, as both countries could not agree on how to proceed. (YE AUNG THU/AFP/GETTY IMAGES)

THE BANKS OF THE IRRAWADDY RIVER IN BURMA ON OCT. 2, 2015. Although not officially part of the Belt and Road Initiative, the $3.6 billion Myitsone Dam project is an example of a Chinese infrastructure project in a very poor country that hasn’t gone as planned. Construction has been suspended for six years, as both countries could not agree on how to proceed. (YE AUNG THU/AFP/GETTY IMAGES)
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Sailors with the Chinese navy stand on the deck of a missile frigate in Manila on April 13, 2010. The Chinese regime is building a military base in Djibouti that will extend its military reach. (Ted Aljibe/AFP/Getty Images)Sailors with the Chinese navy stand on the deck of a missile frigate in Manila on April 13, 2010. The Chinese regime is building a military base in Djibouti that will extend its military reach. (Ted Aljibe/AFP/Getty Images)

China’s first overseas military base—located at a critical choke point for global trade looking to navigate the Suez Canal—could be a geopolitical game changer, but it has less impact in military terms.

Establishing the Djibouti base at the Horn of Africa signals the Chinese regime’s long-term strategic intentions, say experts. A Chinese Communist Party that once pledged to stay out of the affairs of other countries is now building military capacity far beyond its immediate border. 

But the change is less important to China’s military capability than to its ability to directly intervene in global shipping. Earlier this year, the regime convinced Panama—home to the world’s other great shipping pass—to cut ties with Taiwan and fully back China’s claim on the island nation, which the regime describes as a breakaway province. 

These moves follow a series of port deals that have given the regime the ability to ensure its critical shipping lanes. 

Until now, however, none of those facilities have been for direct military use.

Establishing the Djibouti base reverses a long-standing military policy, said Gabe Collins, a researcher and co-founder of China Signpost.

“If you look at basic foreign policymaking throughout the vast majority of the PRC’s history, overseas bases are major redlines they weren’t willing to cross, and they pretty clearly crossed that now,” he said. Collins co-authored a report on the base and its implications two years ago.

Territorial claims in the South China Sea. (VOA News)

Territorial claims in the South China Sea. (VOA News)

The change comes as the Chinese regime becomes increasingly bellicose in its expansive claim to a major swath of the South China Sea. The regime has also been vocal and threatening in its ongoing and multiple border disputes with India. Those disputes have reached an intensity not seen in decades.

Military reform

Personnel from China are now en route to build out the facility, carried on ships that are part of the regime’s rapidly modernizing military.

That military is being reformed to develop the capability to fight battles beyond its shores.

The People’s Liberation Army’s (PLA) aims to, among other things, “improve its ability to fight short-duration, high-intensity regional conflicts at greater distances from the Chinese mainland,” reads the secretary of defense’s 2017 report to Congress on Chinese military developments.

While the regime is most intent on potential conflict in the South and East China seas, Djibouti’s position on the northwestern edge of the Indian Ocean has fueled concern in strategic rival India that the PLA is gaining another position that could threaten Indian interests.

Limited military value

Fortunately for India, the actual military strategic value of the base is limited, said Collins. While it may be useful to launch attacks against much weaker foes in the Middle East or North Africa with limited attack capabilities, it is as much of a liability as it is an asset in a conflict with a greater power.

“I suspect that base would become a high explosive sponge fairly quickly. It’s a targeter’s dream because it’s built a way outside of the town,” he said.

Using Djibouti as a base of operations to fight another great power would be like throwing stones from a house made of “very, very, very thin glass,” said Collins. The base wouldn’t last long, he said.

The base is more useful for power projection into regional conflicts, a refueling and resupply depot rather than a base of operations. The fact that the United States, France, and Japan have bases there reinforces the point. To date, China has used its commercial facility there for years in ongoing anti-piracy efforts and to evacuate 500 Chinese nationals from Yemen in 2015.

Those operations gave China the pretext to forward-deploy naval forces in the region. With its Djibouti foothold now being expanded for military use, the regime gains a base in a country that is relatively stable in a region rife with conflict. For an expansionist China looking to build geopolitical influence in Africa and with oil-rich Gulf states, it’s an important gain.

“If you have an amphibious ship with some armed helicopters on it, and you are dealing with insurgents in some countries in East Africa, or even Yemen or place like that, you just came to the table with a lot of currency and you can play all night long,” said Collins.

Even if India can have some confidence that the base has limited military value, the ability China gains to forward deploy its navy along a critical shipping lane has unsettling implications.  

Pax Sinica

The Chinese regime has been working to secure its presence at the world’s most important chokepoints for shipping oil: the Strait of Malacca, the Suez Canal, the Strait of Hormuz, the Panama Canal, the Bab el-Mandeb Strait, and the Turkish Straits.

The Chinese reigme is working to gain influence at every major oil trade chokepoint. (Epoch Times)

The Chinese reigme is working to gain influence at every major oil trade chokepoint. (Epoch Times)

In doing so, the regime could play a major role securing or controlling world trade. That trade is now assured through the “Pax Americana,” a state of relative international peace overseen by the United States.

But a “Pax Sinica,” or “Chinese Peace,” could look very different, said Collins.

“One of the things you have to look at is the countries that are serving as security guarantor, you have to see what sort of mentality they bring to the table. Are they coming to this with a mercantilist mindset or much more with a globalist and trading oriented mindset,” asked Collin.

The United States has been an equal opportunity security provider, he said, basically indifferent to where oil was going, whether it be Europe or East Asia.

“We don’t discriminate at all in how we provide security based on the destination of the shipment and so I think that’s something that makes the Pax Americana unique,” he said.

While China’s intentions are unclear, its aggressive claims in the South China Sea and habit of using PLA hackers to steal commercial technology for China’s state-owned companies and high-priority industries are just two of many examples fueling allegations that the regime takes the mercantilist approach to trade.

At the moment, China can do little more than fly its flag in Djibouti, said Collins. It naval assets are limited to the few warships and support vessels that have made a passing presence there.

But that could change, and China could take a tactic it has used successfully in the South China Sea—using “coercive tactics, such as the use of law enforcement vessels and its maritime militia, to enforce maritime claims and advance its interests in ways that are calculated to fall below the threshold of provoking conflict.”

From that perspective, even if the base has little value in an actual war, it could boost efforts to otherwise assert the interests of the Chinese regime.

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A woman walks past an electronic board showing Hong Kong share index outside a local bank in Hong Kong, Monday, Sept. 12, 2016. Regulators are looking into a mysterious group of companies known as 'The Enigma Network' after a sudden unexplained stock market crash. (AP Photo/Vincent Yu)A woman walks past an electronic board showing Hong Kong share index outside a local bank in Hong Kong, Monday, Sept. 12, 2016. Regulators are looking into a mysterious group of companies known as 'The Enigma Network' after a sudden unexplained stock market crash. (AP Photo/Vincent Yu)

A mysterious crash within an obscure corner of the Hong Kong Stock Exchange has elicited regulatory scrutiny, fanned rumors of conspiracy, and renewed calls for changes in the city’s financial markets.

Over a period of two days in June—June 27 and June 28—a handful of small-cap stocks fell dramatically, wiping out around $6 billion in market value. The hardest hit stock was down more than 90 percent intra-day, and 13 stocks fell at least 50 percent on June 27.

Although impact from the sudden crash was isolated, the decline has hit hard Hong Kong’s small-cap exchange Growth Enterprise Market (GEM). As of July 7, the S&P/HKEX GEM index is down 21 percent since Jan. 1, and 11 percent since June 26.

The recent crash in Hong Kong small caps underscores the reputation for wild swings at the Hong Kong Stock Exchange (HKEX) and its subsidiary GEM. Although HKEX is producing solid returns this year—the Hang Seng Index is up 15 percent—some individual stocks have experienced high volatility. For instance, China Huishan Dairy Holdings Co., one of China’s biggest diary producers listed in Hong Kong, saw its stock drop more than 85 percent in one day in late March, prompting the exchange to suspend trading of its stock.

‘The Enigma Network’

But there’s something unsettling about the nature of the two-day market crash in late June.

A dozen of the stocks that experienced catastrophic crashes on June 26 and 27 were all part of a group of companies called out by Hong Kong-based independent stock analyst and gadfly investor David Webb.

Webb identified them as part of “The Enigma Network,” the name he gave a web of 50 Hong Kong-listed companies with significant cross-ownership. Webb, a former board member of HKEX, urged investors in May not to purchase stocks on the list due to their opaque structures and balance sheet disclosures.

The Engima Network

The Enigma Network: 50 stocks not to own. (webb-site.com)

Companies within “The Enigma Network” hold stakes in each other from less than 1 percent to more than 50 percent. The companies in the group span multiple industries across real estate, finance, and consumer products, including umbrella maker China Jicheng Holdings Ltd. and GreaterChina Professional Services Ltd., the pending owner of English football club Hull City FC. Both Jicheng and GreaterChina saw their shares sink more than 90 percent during the June crash.

Webb, who has studied Hong Kong stocks extensively, first suspected the correlation and began to connect the dots after noticing balance sheet disclosures of “financial assets” with no additional detail at numerous companies.

The picture came into focus as the companies increased their financial disclosures after Webb “began filing complaints with the Stock Exchange that the for-profit regulator had failed to enforce a listing rule which requires annual and interim reports to disclose ‘significant investments held, their performance during the financial year, and their future prospects.’”

The cross-holding was confirmed after one of the “Enigma” companies, Amco United, a medical device maker, issued a profit warning on June 28 to investors that a “substantial loss” is expected in the first half of 2017 due to its ownership in other listed securities.

This has also caught the attention of regulators. According to Bloomberg, Hong Kong’s Securities & Futures Commission (SFC) said the affected stocks “tended to have characteristics that can be conducive to extreme volatility and to market misconduct: multiple relationships between different companies and listed brokerage firms, high shareholding concentrations, thin turnover, and small public floats.”

The SFC did not confirm or deny whether there’s an investigation into the June crash.

Lerado Financial

A common thread among a few of the biggest decliners appeared to be Lerado Financial Group Co., a Hong Kong-based securities brokerage that’s currently under regulatory investigation. Lerado on June 27 disclosed that it had sold 1.48 billion shares of China Jicheng—no doubt contributing to Jicheng’s crash on the same day.

Lerado itself has been under scrutiny. Its shares were suspended from trading beginning June 6, on allegations that a company circular dated Oct. 26, 2015 included “materially false, incomplete or misleading information,” according to SFC, the Hong Kong securities regulator.

In Lerado’s 2015 document, the company disclosed fundraising plans to expand the margin lending business of its subsidiary Black Marble, which had planned to underwrite a share placement for GreaterChina Professional and an open offer for China Investment & Finance Group Ltd., according to TheStreet.com.

Shares of GreaterChina Professional fell more than 90 percent on June 27. China Investment & Finance shares dropped 52 percent on June 27 and 46 percent on June 28.

An obvious theory for the crash of these stocks is that the owner of Lerado—whose shares have been suspended from trading—needed to raise money to meet a margin call or some other obligation and the only way to do so was to dump the shares of Lerado’s underlying investment holdings.

Other theories abound. One hypothesis—proposed by a South China Morning Post columnist—suggests the crash was orchestrated by a pyramid schemes in mainland China linked to Hong Kong penny stocks.

Chinese Anti-Corruption Links

The HKEX and GEM market turbulence could be linked to ongoing regulatory overhaul within China’s financial sector. The activities of some of China’s biggest overseas acquirers have recently been curtailed, and a few influential financial and regulatory leaders were placed under investigation by anti-corruption watchdogs.

David Chung Wai Yip, chairman of GreaterChina Professional, was arrested on April 20 by Hong Kong Independent Commission Against Corruption according to a statement by the company.

Regulatory clampdowns on mainland Chinese stockbrokers could also have contributed to the Hong Kong volatility. “As capital was tightened up, some stock dealers might demand more money from clients because of limited supply. It ended up that one company didn’t get enough capital, resulting in a domino effect,” Zhiwei Zhang of Prudential Brokerage Ltd. told The Epoch Times.

Zhang also saw a connection between the investigation and Chinese leader Xi Jinping’s crackdown on outbound capital flows. “It could be that they want to tidy up the stock market before July 1… and also to crack down on the disloyal and corrupt guys; that’s another possibility.”

Small-Cap Governance

Recent HKEX and GEM volatility have renewed calls for greater regulatory oversight within Hong Kong’s financial markets—the world’s fourth largest.

In particular, small-cap exchanges such as Hong Kong-based GEM, U.S.-based OTC Markets, and London-based AIM have long been criticized for being a haven for unvetted, often fraudulent companies.

For example, HKEX and GEM could use better rules to combat shell companies, whose stock could jump on expectations they will be acquired by Chinese firms for backdoor listing—acquiring an existing Hong Kong-listed entity to circumvent stringent filing and disclosure requirements. Such stock gains are purely speculative and not grounded in economic fundamentals.

There’s evidence authorities are about to take action. HKEX recently proposed a review of GEM and changes to stock listing requirements, according to a notice to seek public comment filed June 16.

The proposals, among other changes, seek to address critical issues related to “quality and performance of applicants to, and listed issuers, on GEM.”

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People walk past the building with the listed address of Tomorrow Holdings' Beijing office, China on Feb. 3, 2017.  (REUTERS/Thomas Peter)People walk past the building with the listed address of Tomorrow Holdings' Beijing office, China on Feb. 3, 2017.  (REUTERS/Thomas Peter)

HONG KONG—The financial empire of missing Chinese-born tycoon Xiao Jianhua has put billions of dollars of investments up for sale, including stakes in a life insurer, a trust and banking assets, three people involved in the process told Reuters.

A billionaire with links to China’s Communist Party elite, Xiao vanished earlier this year. He was last seen in the early hours of Jan. 27, leaving the Four Seasons Hotel in Hong Kong in a wheelchair with his head covered, accompanied by several people described in media reports as mainland Chinese agents.

Xiao’s whereabouts are not known but his dramatic disappearance sparked widespread speculation he had been caught up in Chinese leader Xi Jinping’s crackdown on corruption.

Chinese authorities have not commented on Xiao’s disappearance, and his family could not be reached for comment.

Two of the sources with knowledge of the process said that now Chinese authorities are pressing Tomorrow Holdings, Xiao’s conglomerate, to pare back its sprawling asset portfolio, which includes stakes in more than 30 domestic financial institutions.

The sale is part of Beijing’s broader efforts to rein in risky practices by financial services firms, the sources said. None of the three sources could be named as the sale plans are not public.

The same two sources said Tomorrow had set up an internal team to handle the sale, which will include stakes in Huaxia Life Insurance, New China Trust Co, Bank of Weifang and Baoshang Bank. The stakes are substantial, though the specific percentage levels have not been disclosed and it is unclear if Tomorrow controls all of the companies directly.

No external advisers have been mandated, the sources said, and they also did not give any indication of expected prices for individual assets.

“The process is at an early stage and informal feelers are being sent to some large insurers as well as private equity companies,” said a fourth person with knowledge of the plans.

People pass by the entrance to Four Seasons Hotel, where Chinese billionaire Xiao Jianhua was last seen on January 27, in Hong Kong, China on Feb. 1, 2017.(REUTERS/Bobby Yip)

People pass by the entrance to Four Seasons Hotel, where Chinese billionaire Xiao Jianhua was last seen on January 27, in Hong Kong, China on Feb. 1, 2017.(REUTERS/Bobby Yip)

According to one source with direct knowledge of the situation, Xiao’s wife Zhou Hongwen, who co-founded Tomorrow with him in 1999, is running the business in his absence, but it was unclear how much she was involved in the decision to put the assets up for sale and whether she is closely involved in the process.

Tomorrow and the four subsidiaries did not return phone calls, emails and messages seeking comment. China’s insurance and banking regulators did not respond to requests for comment.

The State Council’s information office also did not respond to a request for comment.

Insurance Play

Beijing has cracked down on other groups that, like Tomorrow, have used cash from insurance products to invest aggressively in riskier deals in areas such as property and soccer.

Last month, authorities detained Wu Xiaohui, chairman of Anbang Insurance Group, one of China’s flashiest overseas dealmakers and owner of the Waldorf Astoria hotel in New York.

Anbang has said its chairman is temporarily unable to fulfill his duties and has not commented further.

Even a partial dismantling of Tomorrow‘s business empire, though, would take the aggressive government behavior a step further than previous warnings or punishments, and raise concerns for other tycoons and their companies.

Xiao, who is in his mid-40s and has close ties with some of China’s senior leaders and their families, was ranked 32nd on the 2016 Hurun China rich list, China’s equivalent of the Forbes list, with a net worth of $6 billion. His assets range from financial services to sugar and cement.

Xiao, who began his career selling imported computers, had lived for years in serviced apartments in Hong Kong.

Tomorrow‘s Huaxia Life grabbed headlines last year as China’s financial regulators cracked down on high-yield, short-term investment products like universal life insurance products, that are part insurance, part investment.

Huaxia’s universal life insurance division recorded 138 billion yuan ($20.3 billion) in premium income last year—75 percent of its total business, official data shows.

In December, the China Insurance Regulatory Commission suspended the firm’s online insurance business and barred it from seeking approval for new products for three months. The regulator said the insurer had failed to fix problems concerning fake client information.

The fourth source said the insurance watchdog had demanded better oversight, but did not feel Huaxia had made progress and wanted to see it owned by someone other than Tomorrow.

Barclays bought a near-20 percent stake in another Tomorrow firm, New China Trust a decade ago, making it the first foreign bank to invest in a Chinese trust firm. Trusts are non-bank lenders that raise funds with high-yielding investments. Barclays’ stake has since been diluted to below 6 percent.

One of the sources said Barclays would sell part or all of its remaining shares. Barclays declined to comment on its stake.

Tomorrow will keep hold of affiliates including Harbin Bank, which lends to small businesses, brokerage Hengtai Securities and Tianan Life Insurance, maintaining licenses in the main financial sectors, the people said.

The affiliates did not respond to requests for comment.

By Julie Zhu

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Laborers renovate a roof of a residential lane house in Shanghai on Aug. 21, 2014. (JOHANNES EISELE/AFP/Getty Images)Laborers renovate a roof of a residential lane house in Shanghai on Aug. 21, 2014. (JOHANNES EISELE/AFP/Getty Images)

When the economy started to cool in the beginning of 2016, China opened up the debt spigots again to stimulate the economy. After the failed initiative with the stock market in 2015, Chinese central planners chose residential real estate again.

And it worked. As mortgages made up 40.5 percent of new bank loans in 2016, house prices were rising at more than 10 percent year over year for most of 2016 and the beginning of 2017. Overall, they got so expensive that the average Chinese would have had to spend more than 160 times his annual income to purchase an average housing unit at the end of 2016.

Because housing uses a lot of human resources and raw material inputs, the economy also stabilized and has been doing rather well in 2017, according to both the official numbers and unofficial reports from organizations like the China Beige Book (CBB), which collects independent, on-the-ground data about the Chinese economy.

“China Beige Book’s new Q2 results show an economy that improved again, compared to both last quarter and a year ago, with retail and services each bouncing back from underwhelming Q1 performances,” states the most recent CBB report.

However, because Beijing’s central planners must walk a tightrope between stimulating the economy and exacerbating a financial bubble, they tightened housing regulations as well as lending in the beginning of 2017.

Has the Bubble Burst?

Research by TS Lombard now suggests the housing bubble may have burst for the second time after 2014.

“We expect the latest round of policy tightening in the property sector to drive down housing sales significantly over the next six months,” states the research firm, in its latest “China Watch” report.

One of the major reasons for the concern is increased regulation. Out of the 55 cities measured in the national property price index, 25 have increased regulation on housing purchases.

In Beijing, for example, some owners of residential real estate can no longer sell their apartments to private buyers—instead, they have to sell to businesses, because their apartment has been marked for business use by the authorities.

Other measures include higher down payments, price controls, and increasing the time until the unit can be sold again.

“First- and second-tier cities have enacted such draconian measures that it is nigh impossible to buy or sell a property,” states the report.

Credit Tightening

Although the central bank left its benchmark mortgage lending rate unchanged at 4.9 percent, banks have increased the rates they charge on mortgages to as high as 6 percent and, in some cases, have stopped giving out mortgages altogether because they have used up their quotas set by regulators.

The People’s Bank of China wants to lower the share of mortgage lending to 30 percent of new loans, which should influence new demand for housing.

“Unlike 10 years ago, when most Chinese households made a 50 to 70 percent down payment to buy a new apartment, more than 80 percent of borrowers in the past two years have put down 30 percent or less. With reduced mortgage funding availability, we believe it is unlikely that households will be able to finance their purchase through savings,” states the TS Lombard report.

So far, the slow down in larger cities has been offset by more activity in smaller cities, which haven’t implemented as many tightening measures.

“Overall revenues and profits plunged in Tier 1 cities, with the slowdown concentrated primarily in the Beijing and Shanghai regions. Hiring stagnated, while cash flow worsened across the board,” the China Beige Book says.

However, TS Lombard expects smaller cities to follow the bigger cities with more restrictive measures for property buying, which will ultimately lead to a decline in housing transactions, if not prices outright.

“Property sales will decelerate notably in [the second half of 2017], with the monthly number of new residential housing transactions set to drop by 10 percent year-on-year, compared with a year-on-year rise of 8.3 percent in May.”

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  • Author: <a href="http://www.theepochtimes.com/n3/author/valentin-schmid/" rel="author">Valentin Schmid</a>, <a href="http://www.theepochtimes.com/" title="Epoch Times" rel="publisher">Epoch Times</a>
  • Category: General
June 27, 2017

A customer selects vegetables at a supermarket in Hangzhou, in eastern China's Zhejiang province on March 10, 2016. (STR/AFP/Getty Images)A customer selects vegetables at a supermarket in Hangzhou, in eastern China's Zhejiang province on March 10, 2016. (STR/AFP/Getty Images)

After severe jitters in 2015 and 2016, the Chinese economy and its foreign exchange rate have been mostly stable in 2017. Except for volatility in interest rates and the stock market, everything seems fine ahead of the important Party Congress to be held this fall. At the congress, the regime will confirm the next Party leadership.

Of course, official figures, like the 6.9 percent annualized GDP growth rate released for the first quarter of 2017, are unreliable and merely a rough indicator of where the journey is going.

To provide a more accurate read on China’s economy, Leland Miller and his team at China Beige Book International (CBB) interview thousands of companies and hundreds of bankers on the ground in China each quarter. They collect data and perform in-depth interviews with Chinese executives. 

The CBB’s recent report confirms the eerie stability of the Chinese economy.

“So far, 2017 has played out as a best-case scenario. … The remarkable absence of both domestic and foreign shocks has created the stable environment corporates need to outperform most expectations, including ours,” states a preview to the full Q2 2017 report.

The retail, services, and manufacturing sectors all showed an increase in activity. Hiring was also better than in an already good first quarter. This is important for the Chinese regime, as unemployed workers are unhappy workers who often express their unhappiness in mass protests.

According to the official unemployment rate, this is hardly ever a concern, as it has been hovering between 3.97 percent and 4.3 percent for the last decade. However, when the real economy dipped in 2016, the China Labour Bulletin logged a total of 1,378 strikes and protests in the second half of last year.

Extend and Pretend

However, despite the overall positive response from the firms surveyed by CBB, there are a few traditionally Chinese “extend and pretend” caveats to the rosy picture.

For example, every sector reported record inventories, which is positive for production and jobs, but not for sales. If the stocked products aren’t sold shortly, it will hit the companies’ bottom line.

“The same companies who report solid results on most indicators also continue to show cash flow in the red—corporate health has not yet responded to better growth,” states the CBB preview.

Then there is the credit market, a source of worry for China watchers since the end of last year. China’s bank borrowing rates have been creeping up from 3 percent to almost 4.5 percent since late 2016, and CBB notes that this is now affecting the bank’s corporate customers.

“In Q1 … credit tightening was limited to interbank markets. In Q2, it hit firms: Bond yields and rates at shadow banks touched the highest levels in the history of our survey, and bank rates their highest since 2014,” states the report.

According to CBB, however, overall borrowing was relatively stable, despite higher costs and the fact that corporate bond issuance collapsed in 2017. Why? Because firms believe in the ability of the regime to keep things stable beyond 2017.

As the report puts it, “while borrowing did see a mild drop for the third straight quarter, companies’ six-month revenue expectations remain robust in every sector save property. Companies assume deleveraging is transient, likely because they are skeptical the Party will allow economic pain in 2017.”

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Chairman of China's Wanda Group Wang Jianlin delivers a speech during the Signing Ceremony for the Strategic Partnership between Wanda Group and The Abbott World Marathon Majors in Beijing on April 26       (Wang Zhao/AFP/Getty Images)Chairman of China's Wanda Group Wang Jianlin delivers a speech during the Signing Ceremony for the Strategic Partnership between Wanda Group and The Abbott World Marathon Majors in Beijing on April 26       (Wang Zhao/AFP/Getty Images)

China’s biggest foreign asset purchasers, including Wang Jianlin’s Wanda Group, are in the crosshairs of Chinese regulator amidst a Xi Jinping-led effort to root out corruption, reduce money laundering, and curb excessive risk-taking within China’s financial sector.

The China Banking Regulatory Commission (CBRC) last week asked state-controlled banks to assess their credit exposure to several Chinese companies involved in overseas acquisitions, according to Caixin, a respected mainland Chinese business magazine. A few banks reduced their holdings of bonds related to these companies.

Companies targeted by the regulator include Anbang Insurance Group Co., Dalian Wanda Group, HNA Group, Fosun International, and a unit of Zhejiang Luosen which acquired Italy’s AC Milan soccer team in April. The action caused a dramatic selloff of the stocks and bonds of the affected companies last week.

While results of this particular regulatory action are yet to be concluded, CBRC’s scrutiny of China’s biggest overseas acquirers is the latest in a string of crackdowns within the financial sector. Sources close to Zhongnanhai, the Chinese Communist Party (CCP)’s central headquarters, told The Epoch Times earlier this year that the Xi leadership is focusing on tackling corruption in the Chinese financial industry in 2017.

In February, Xiao Jianhua, influential billionaire investor and founder of Tomorrow Group, was brought from Hong Kong to Beijing for official questioning. In April, the former head of China Insurance Regulatory Commission Xiang Junbo was placed under investigation. Earlier this month, Wu Xiaohui, chairman of Anbang Insurance Group, was detained by authorities in Beijing.

Voracious Acquirers

Anbang, Wanda, HNA, and Fosun are some of the most active and aggressive bidders for overseas assets.

Together, these four companies bought $56 billion in foreign companies over the past five years, according to analysis from the Financial Times. The massive capital flight as a result has contributed to devaluation of the Chinese currency—already pressured by a slowing Chinese economy—while increasing the balance sheets of overleveraged Chinese banks.

All four companies have something in common—they’re all privately owned.

Wang Jianlin, founder and chairman of real estate and entertainment conglomerate Wanda and one of China’s richest individuals, has bought Hollywood production studio Legendary Entertainment Group, cinema chain AMC Entertainment, and luxury hotels and residential developments across the UK, Australia, and United States. Wanda has extensive connections and influence in Hollywood and is a main conduit of China’s soft power projection.

Shanghai-based Fosun, whose co-owner Guo Guangchang models himself after investor Warren Buffett, owns Canadian entertainment group Cirque du Soleil, French vacation resort company Club Med, British hospitality firm Thomas Cook Group, and apparel and jewelry labels St John and Folli Follie.

Billionaire Chen Feng built HNA Group from a regional airline in the resort island of Hainan into one of the world’s most acquisitive conglomerates during the last few years. HNA has holdings across the aviation, tourism, logistics industries, and owns California-based technology distributor Ingram Micro Inc. HNA has large stakes in Hilton Hotels, cargo handler Swissport, and is also the biggest single shareholder (with 9.9 percent ownership) in Deutsche Bank AG, the German international banking giant.

Anbang Insurance, whose chairman Wu Xiaohui was detained by authorities earlier this month, owns the Waldorf-Astoria Hotel in New York, and has several high-profile real estate holdings across the United States, Canada, and Europe.

Opaque Ownership Structures and Capital Sources

All four companies have something in common—they’re all privately owned.

And some of the companies have complex and opaque ownership structures, as well as highly leveraged capital sources.

HNA’s ownership structure is a complex web of investment trusts, provincial and local government agencies, and small business ventures. Thirteen individuals ultimately control 76 percent of the company through intermediary companies. Chen Feng, the public face of the company, controls 15 percent of HNA and has connections with former presidential candidate Jeb Bush and American investor George Soros. HNA’s biggest owner, Guan Jun (with a 29 percent stake), doesn’t work for the company and is a relative unknown. Listed addresses for Guan through various public filings and records include a side street beauty salon in western Beijing, a shabby Beijing office building, and a nondescript apartment building in southwest Beijing, according to the Financial Times.

HNA is also highly indebted. At the end of 2014, HNA had a combined debt of 196.9 billion yuan ($29.5 billion) on its balance sheet, compared to only 73.2 billion yuan ($10.9 billion) of equity, according to prospectuses filed with the Irish securities regulators in connection with a 2015 $1 billion bond offering of one of its subsidiaries.

Anbang Insurance’s funds come from sales of controversial high-yield products called universal life policies, or risky wealth management products which combine bonds and life insurance policies. These products differ from typical annuities as they promise very high returns to investors, something typical insurance companies cannot justify given the conservative nature of their asset holdings. Sales of such products have been recently banned by the Chinese insurance regulator.

Anbang’s capital base suddenly swelled in 2014, with a number of mysterious investors injecting a total of 50 billion yuan into the company. Research by Caixin found that some of Anbang’s 39 investors are obscure outfits such as auto dealerships, real estate firms, and mine operators that sometimes use shared mailing addresses, many of which are connected to Wu. There’s also a trend of major state-level investors scaling back their ownership, with SAIC Motor and Sinopec decreasing their ownership levels from 20 percent each to 1.2 percent and 0.5 percent, respectively.

Intersection of Business and Politics

Business and politics in the Chinese regime have always been closely intertwined. And Anbang chairman Wu Xiaohui’s detention earlier this month appears to be partially politically motivated.

A source close to high-level discussions in Zhongnanhai told The Epoch Times that Wu has close ties to the family of Zeng Qinghong, the former Chinese vice chairman and right-hand man of former Communist Party boss Jiang Zemin. 

Jiang headed the CCP for more than a dozen years (1989–2002) and continued holding sway over the Chinese regime through a network of cronies for another 10 years (2002–2012). Since entering office in 2012, Xi has sought to uproot the influence of Jiang and his faction, who oppose Xi, and consolidate his control over the Chinese regime. 

The source said that Wu used financial transactions to funnel and launder funds abroad on behalf of the Jiang faction, while at the same time using his role as a business tycoon to spy on and influence foreign dignitaries.

Whether last week’s inquiry into China’s other major overseas asset acquirers is connected to the reining in of powerful Chinese financiers ahead of a CCP’s 19th National Congress, a key political conclave to be held at the end of the year, is still unclear. For now, major Chinese state-controlled banks have declared no intention of ending relationships with or cutting credit to these companies.

Nonetheless, investors were rattled by the regulatory announcement.

HNA Holding Group stock fell 6 percent, while shares of Fosun International Ltd. fell almost 10 percent in Hong Kong on June 22. On the same day, Fosun Pharmaceutical, listed in Shanghai, fell around 8 percent, while the Shenzhen-listed Wanda Film dropped as much as 9.9 per cent in the morning and had to be temporarily halted from trading.

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People walk past an entrance to the Anbang Group's offices in Beijing, June 14. (AP Photo/Mark Schiefelbein)People walk past an entrance to the Anbang Group's offices in Beijing, June 14. (AP Photo/Mark Schiefelbein)

In a move that stunned New York dealmakers at the time, the famed Waldorf-Astoria Hotel on Park Avenue was sold in 2014 to a little-known Chinese company.

That Chinese company is Beijing-based Anbang Group, an insurance conglomerate known for its aggressive overseas asset purchases, including a failed 2016 bid to acquire Starwood Hotels and Resorts. At the time, Chinese companies were engaged in a global takeover spree, and Anbang appeared to be leader of the pack.

Merely a year later, the once high-flying Anbang is suddenly grounded.

Anbang billionaire chairman Wu Xiaohui has been detained by Beijing authorities. And several Chinese state-owned banks were told to stop their dealings with the company, sources told Bloomberg on June 15. Its more than 30,000 employees and nearly $300 billion of assets are left hanging in the balance.

On June 9, Beijing anti-corruption investigators detained Wu, according to the Financial Times. While it is yet unclear if the Central Commission for Discipline Inspection will announce a formal investigation of Wu, he is certainly the highest-profile business executive reeled in so far by Chinese leader Xi Jinping’s sweeping anti-corruption efforts.

Anbang’s Meteoric Rise

In a short time, Anbang has risen from relative obscurity to become one of China’s largest holders of foreign assets. Before its activities were curtailed recently, Anbang had become well known among Western private equity firms and real estate moguls as a competitive bidder for assets.

Wu and Anbang have cultivated extensive business and political connections abroad. Wu is known to be close to Jonathan Gray, head of real estate at U.S. private equity giant Blackstone Group. A few of Anbang’s recent asset acquisitions have been bought from Blackstone. Wu was also in discussion to acquire a stake in the Manhattan office tower owned by Jared Kushner, son-in-law and senior advisor of President Donald Trump, but the deal was called off in March.

Today, Anbang’s portfolio of well-known foreign assets includes the Waldorf-Astoria Hotel, the 717 Fifth Avenue building in New York, the Chicago-based Strategic Hotels & Resorts Inc., Belgian insurer Fidea, Belgian bank Delta Lloyd, and a controlling stake in South Korean insurer Tongyang Life Insurance.

Anbang_holdings

List of major foreign asset holdings of Anbang Group, as of June 1, 2017 (The Epoch Times)

‘White Gloves’

Anbang’s sudden fall seems as startling as its rapid ascent. What caused the disgrace of Wu Xiaohui, who led a conglomerate described by the Financial Times in 2016 as “one of China’s most politically connected companies?”

In China, business is always driven by politics. And Wu’s political network could very well landed him in trouble. 

Wu was in discussion to acquire a stake in the Manhattan office tower owned by Jared Kushner.

Wu’s background, like many other Chinese tycoons, is relatively obscure. Born in Wenzhou, Zhejiang Province, Wu founded Anbang as a small insurance company in 2004. His fortunes elevated after marrying Zhuo Ran, a granddaughter of former Chinese Communist Party (CCP) leader Deng Xiaoping.

Overseas Chinese language media and sources of this newspaper note that Wu and Zhou are now divorced, although Wu and Anbang have publicly denied such reports.

Wu, 50, is believed to be a close ally of an influential political faction that is in opposition to the Xi leadership. Jiang Zemin was head of the CCP for over a dozen years (1989–2002) and continued holding sway over the Chinese regime through a network of cronies for another ten years (2002–2012). Since coming to office in 2012, Xi Jinping has waged a battle to uproot the influence of Jiang and his faction. 

Sources close to Zhongnanhai, the central headquarters of the CCP, told The Epoch Times that Anbang and Wu have close ties to the family of Zeng Qinghong, the former Chinese vice premier, member of the powerful Politburo Standing Committee, and longtime confidant of Jiang.

The source said that both Wu and Xiao Jianhua—the Chinese billionaire and Tomorrow Group owner who was abruptly brought back to Beijing from Hong Kong for investigation earlier this year—are key “white gloves,” or money launders, of the Zeng family and the Jiang faction.

The source added that Wu and Xiao used financial transactions to funnel and launder funds abroad on behalf of the Jiang faction, while at the same time parlaying their roles as business tycoons to spy on and influence foreign dignitaries.

There are questions surrounding the sources of Anbang’s capital. The company was founded in 2004 as a small insurer with a mere 500 million yuan ($73 million) of capital and eventually became a behemoth with assets of almost 1,971 billion yuan ($292 billion).

Anbang’s capital suddenly swelled in 2014, with a number of mysterious investors injecting a total of 50 billion yuan into the company. Research by Caixin, a respected mainland business magazine, found that some of Anbang’s 39 investors are obscure outfits such as auto dealerships, real estate firms, and mine operators that sometimes use shared mailing addresses, many of whom are connected to Wu. There’s also a trend of major state-level investors scaling back their ownership, with SAIC Motor Corp. and Sinopec decreasing their ownership levels from 20 percent each to 1.2 percent and 0.5 percent respectively.

Waldorf_hotel_17

The Waldorf-Astoria hotel is shown January 17, 2005 in New York City. (Spencer Platt/Getty Images)

The insurer also relies on fundings from selling risky wealth management products called universal life policies. These products offer high interest rates and are a hybrid bond and a life insurance policy, have been extremely popular with consumers dissatisfied with bank deposit rates of around 1 percent.

Crackdown on ‘Barbaric’ Insurance Sector

Xi Jinping has made reforming the financial industry a core focus this year. At a speech on March 21, Premier Li Keqiang urged authorities to take powerful measures to prevent corruption in the financial sector, which is vulnerable to the advent of shadow banking, bad assets, and illegal internet financing, according to state-controlled media Xinhua.

Xi has also shown he’s unafraid to challenge captains of industry with extensive political connections. Wu’s detention is the latest in a string of recent disciplinary actions taken against high ranking officials within the financial industry, and thus far, with the insurance sector as ground zero. In February, chairman of financial conglomerate Baoneng Group Yao Zhenhua was banned from the insurance industry for ten years. In April, the former head of China Insurance Regulatory Commission (CIRC) Xiang Junbo was placed under investigation.

Sources close to Zhongnanhai have told The Epoch Times early this year that the Xi leadership is focusing on tackling corruption in the Chinese financial industry in 2017. 

China’s insurance industry has garnered immense power—and controversy—during the last six years, a period of deregulation overseen by its former chief regulator, Xiang, currently under official investigation.

From 2012 to 2016, China’s insurance sector grew 14.3 percent overall, and non-life insurance grew 16.5 percent in premium volume, according to data from Munich Re. Last year, China overtook Japan to become the world’s second biggest insurance market by premiums.

During this period, the insurance sector has turned into a den of corporate raiders.

Insurers are traditionally bastions of conservatism, holding stable assets such as government securities and corporate bonds. Insurers by nature must consider preservation of their clients’ capital as paramount. These assets are also liquid and can be easily sold to pay back policy-holders.

Flush with cash from universal life policies, Chinese insurers embarked on a spending spree, amassing portfolios of risky assets not typically associated with insurance, such as stocks, real estate, and foreign companies. Such assets are risky and illiquid, and could impede an insurer’s ability to repay holders during times of distress.

The insurers most closely associated with such practices are Evergrande Life, Foresea Life—a unit of Baoneng—and Anbang. These companies’ business model closely resemble a private equity fund, where capital is expensive and investment returns are the main focus.

Last year, Foresea and Evergrande amassed a large stake in residential real estate developer China Vanke. A public and protracted dispute to wrest control of Vanke from founder and CEO Wang Shi—one of China’s most famous entrepreneurs—ensued, creating a market firestorm that was finally dispelled after Beijing intervened in December.

In late 2016, China’s insurance regulator criticized the entire domestic insurance industry, calling its aggressive purchases of Chinese companies “barbaric.” Wang Shi also portrayed Foresea’s stock accumulation as “barbarian,” a reference to the 1989 book “Barbarians at the Gate” about the hostile takeover of RJR Nabisco by private equity giant Kohlberg Kravis Roberts & Co.

In just six months, Xi has replaced China’s top insurance regulator, banned the sale of universal life policies, and for now, seemingly brought a wild industry to its heels.

But years of free-wheeling cannot be corrected overnight.

Foresea, which depends on cash from sales of universal life products, issued a warning last month of financial difficulties leading to potential social unrest from its customers unless regulators lift the ban on such products. In a letter to regulators, Foresea called for a lifting of ban “to avoid mass riots by clients, causing systemic risks and much damage to the wider industry.”

Reference to “mass riots” is anathema to the CCP and a potential challenge to the Xi leadership. The insurance industry, in the end, may not give up without a fight.

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Demonstrators march against the CETA trade deal near the European Parliament in Strasbourg, France on Feb.15, 2017. Globalization has not been kind to incomes of most of the middle class in developed world economies. (AP Photo/Jean-Francois Badias)Demonstrators march against the CETA trade deal near the European Parliament in Strasbourg, France on Feb.15, 2017. Globalization has not been kind to incomes of most of the middle class in developed world economies. (AP Photo/Jean-Francois Badias)

MONTREAL—Geopolitical risk is running high despite all seeming well with U.S. stock markets, but evaluating broader trends, which include “de-globalization” and China’s economic transition on asset prices and inflation, is critical at this time.

Volatility—the degree of fear in the market that can be measured by the VIX (S&P 500 volatility)—is extremely low. Meanwhile an elevated level of policy-related economic uncertainty prevails; investors have little confidence that impending government actions will work.

“It’s a little bit spooky how disengaged the two have been to each other,” said Lisa Emsbo-Mattingly, Fidelity Investment’s global asset allocation director of research, at the International Economic Forum of the Americas on June 12.

While it seems the world is heading for a period of synchronized economic growth, geopolitics—or non-market factors—such as aging populations and rising inequality remain headwinds.

Diversification has always been critical for investors to smooth market ups and downs on a path to achieving financial goals. In times of market stress, asset prices tend to move together (increased correlation) and it becomes costly to change a portfolio’s investment mix due to greater costs for buying and selling (worse liquidity).

Domestic Focus

With globalization having distributed economic growth toward emerging and frontier markets, the U.S. hegemony has been eroded, said Marko Papic, senior vice president of Geopolitical Strategy at BCA Research, a 68-year-old Montreal-based independent investment firm.

“We know from history, when more countries get to say and pursue what they want, it is a less stable world,” Papic said. “Today we have the highest number of conflicts going on at the same time.”

China has its eye on filling the void left by the United States as the post-Cold War order crumbles. Under Donald Trump, German Chancellor Angela Merkel said the United States can no longer be a reliable partner.

Knowing what’s going on in China now is more important than ever.

— Paul Podolsky, partner, Bridgewater Associates

And Canada intends to play a bigger role on the international stage, based on recent comments from Foreign Affairs Minister Chrystia Freeland.

“We worry that East Asia will be the powder keg of the 21st century,” Papic said. Chinese and American economic symbiosis is tenuous at best.

In a more multi-polar world, Papic argues that it will be smaller and medium-sized businesses that will benefit relative to the large multinationals that prospered as globalization took hold.

“Any economy, sector, or particular stock that derives most of its final demand from within the jurisdiction in which it is domiciled will be the [investment] theme of the next 15 to 20 years,” Papic said.

The China Factor

“Swings in the global economy come from the swings in China’s economy,” said Paul Podolsky, a partner at hedge fund Bridgewater Associates.

China’s boom came from its cheap cost of plentiful labor; however, that’s less true today than it used to be. Its more recent rapid buildup of debt has propped up the world economy.

The issue is that plenty of economies—Canada, South Africa, Australia, Brazil—depend on China’s continuing to operate a credit-driven economic model. However, if the Chinese authorities are able to pull off the difficult transition away from a debt-fuelled investment model toward a domestic consumption model, it will be painful for emerging markets and commodity-driven economies. But China will benefit in the long run.

“Their domestic economy, that really needs to be resolved before they start thinking about global domination,” Papic said about China, whose 19th communist party congress takes place in the fall.

The International Monetary Fund (IMF) revised its forecast for Chinese GDP to grow 6.7 percent in 2017. This is up from a prior estimate of 6.6 percent. Chinese credit growth slowed in May under the tighter supervision of policy-makers.

We worry that East Asia will be the powder keg of the 21st century.

— Marko Papic, senior vice president, Geopolitical Strategy, BCA Research

“Knowing what’s going on in China now is more important than ever,” Podolsky said. He added that the short-term prognosis for China looks good—at least the rapid debt buildup is denominated in its own currency, of which more can be printed.

Specter of Inflation

As globalization grew, production moved to cheaper sources of labor—China and emerging markets. Among the reasons the populist wave rose is the failure of globalization to boost incomes for the middle class in developed world nations like the United States and United Kingdom.

Canada’s finance minister, Bill Morneau, has targeted helping the middle class in his two budgets. “We need to deal with the sense of anxiety people are facing,” he said in discussing the rejection of the status quo seen by the Brexit vote, Donald Trump’s election, and the Liberals returning to power in Canada in 2015.

As the global economy moves away from peak globalization, an upside risk for inflation develops. If free movement of capital and labor is restricted, supply is more costly to produce, resulting in higher prices.

“Our view is that we are exiting a deflationary period and entering an inflationary one slowly but surely,” Papic said. “And then gold will realize its role as a safe haven.”

U.S. stock markets have been in a “Goldilocks” scenario, supported by low interest rates, low inflation, good corporate earnings, and a low threat of an imminent recession.

“I would not say there’s a lot of complacency in the market. The VIX is reflecting a very exuberant market,” Emsbo-Mattingly said, adding that the recovery emanated from a Chinese recovery, which has been good for cyclical stocks globally.

“My concern is we’re at peak valuations, peak growth. A lot of things are as good as they’re going to get,” Emsbo-Mattingly said.

Follow Rahul on Twitter @RV_ETBiz

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A farmer looks at tractors at a farm machine factory on February 21, 2009 in Changchun, Jilin Province, China. (China Photos/Getty Images)A farmer looks at tractors at a farm machine factory on February 21, 2009 in Changchun, Jilin Province, China. (China Photos/Getty Images)

Further adding to doubts about the health of China’s economy, statistics in Inner Mongolia and the northeastern province of Jilin have been found to be problematic, according to recent investigation by the Communist Party’s anti-corruption agency.

Faked data was discovered in some firms and regions, according to a statement from the Central Commission for Discipline Inspection (CCDI).

The statement did not elaborate further on the details, but raised such issues as a lack of the “four awarenesses,” promotion of corrupt officials, and failure to fully implement major decisions issued from the central authorities.

It is common for local officials to overstate their economic growth to gain a favorable report, which is tied to their career progression. Despite repeated stress on data credibility, profit target remains to be the key indicator in reviewing their performance.

Inner Mongolia and Jilin reported a growth of 7.2 and 6.9 percent last year, respectively.

Zhou Hao, an economist at Commerzbank in Singapore, sees the news as a powerful political signal. The statement suggests that data falsification—something very common among Chinese officials— could be treated the same as violation of party discipline, Zhou told Financial Times.

“In China, nobody took fake data seriously before,” he said.

Earlier this year, officials in Liaoning, a neighboring province to Jilin and Inner Mongolia, were found to have falsified data from 2011 to 2014. The exaggerated profit accounted for nearly one fifth of its overall income, which reached a peak of 23 percent in 2014, according to iFeng.

Meng Yuanxin, a researcher for New Mainland Public Institute, said that fabricating data was a widespread phenomenon. “To some degree, China’s financial data is only normal when there’s fake data,” Meng said. “It would be odd otherwise” Meng told Radio Free Asia.

“Officials produce figures, figures produce officials,” he added, referring to the practice of inflating merits to gain promotion.

Jilin and Inner Mongolia both suffer from economic slowdown. Inner Mongolia, a major coal supplier, saw demand dwindle as sustainable energy development became more prominent across China. Jilin, the manufacturing base for China’s automobile industry, has also felt sharp contractions.

Authorities in Jilin and Inner Mongolia are notably associated with Politburo Standing Committee members Zhang Dejiang and Liu Yunshan, two powerful political rivals of the Xi Jinping administration.

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  • Category: General

Participants at Intel's Artificial Intelligence (AI) Day stand in front of a poster during the event in the Indian city of Bangalore on April 4, 2017. (MANJUNATH KIRAN/AFP/Getty Images)Participants at Intel's Artificial Intelligence (AI) Day stand in front of a poster during the event in the Indian city of Bangalore on April 4, 2017. (MANJUNATH KIRAN/AFP/Getty Images)

WASHINGTON—The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to U.S. national security, current and former U.S. officials tell Reuters.

Of particular concern is China’s interest in fields such as artificial intelligence and machine learning, which have increasingly attracted Chinese capital in recent years. The worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and perhaps even push it ahead in strategic industries.

The U.S. government is now looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), the interagency committee that reviews foreign acquisitions of U.S. companies on national security grounds.

An unreleased Pentagon report, viewed by Reuters, warns that China is skirting U.S. oversight and gaining access to sensitive technology through transactions that currently don’t trigger CFIUS review. Such deals would include joint ventures, minority stakes, and early-stage investments in startups.

Defense Secretary Jim Mattis weighed into the debate on June 12, calling CFIUS “outdated” and telling a Senate hearing, “It needs to be updated to deal with today’s situation.”

CFIUS is headed by the Treasury Department and includes nine permanent members, including representatives from the departments of Defense, Justice, Homeland Security, Commerce, State, and Energy.

James Lewis, an expert on military technology at the Center for Security and International Studies, said the U.S. government is playing catch-up.

“The Chinese have found a way around our protections, our safeguards, on technology transfer in foreign investment. And they’re using it to pull ahead of us, both economically and militarily,” Lewis said.

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Two people look towards high-rise buildings in Kowloon, Hong Kong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. (Antony Dickson/AFP/Getty Images)Two people look towards high-rise buildings in Kowloon, Hong Kong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. (Antony Dickson/AFP/Getty Images)

Beijing and Hong Kong have approved a new cross-border bond trading program, called bond connect, hoping to attract a new wave of foreign investors to buy Chinese onshore bonds.

The platform is similar in theory but differs in execution to the existing stock connect between Hong Kong and the mainland, which allows foreign investors to purchase mainland stocks. The bond connect will link Hong Kong to Shenzhen’s bond markets and is expected to go live on July 1, the 20th anniversary of Hong Kong’s handover to China.

Beijing hopes the bond connect will legitimize its bond market on the global stage and help diversify bearers of onshore default risk. But immediate success is unlikely, given the existing lukewarm reception of the similar stock connect program and overall investor skepticism of Chinese credit.

Expanding Access

China is the world’s third largest bond market following the United States and Japan, but is largely closed off from foreign investors. It first opened the onshore bond market to foreign investors in February 2016. Under this arrangement, foreign asset managers wishing to purchase such bonds must register locally in mainland China.

The bond connect will officially eliminate that requirement, as firms in Hong Kong will have the ability to purchase onshore bonds at will, without a mainland license.

In a joint statement May 16, the People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) said that “Northbound trading will commence first in the initial phase, i.e. overseas investors from Hong Kong and other countries and areas (overseas investors) to invest in the China Interbank Bond Market.” The opposite southbound trading, or mainland investors investing in Hong Kong bonds, will commence in the second phase at a later date.

Oppenheimer_bonds1

China is the world’s No. 3 bond market (Source: Oppenheimer Funds)

In theory, bond connect will no doubt expand the market for Chinese onshore bonds and bring in a new wave of investors. “The major advantages of the Bond Connect compared to the existing China Interbank Bond Market scheme are the speed of gaining the access and the fewer onshore account set up needed,” Gregory Suen, investment director of fixed income at HSBC Global Asset Management, told industry publication Fund Selector Asia.

Today, prior to the bond connect, about 473 foreign investment firms are active within China’s onshore bond market with investments totaling 800 billion yuan ($117 billion), according to PBoC estimates. However, the true number of foreign firms holding Chinese debt is less than the official figures, as about 200 of the 473 are investors from the Chinese territory of Hong Kong, which Beijing deems foreign.

To cater to the anticipated trade flow, the Hong Kong Exchanges and Clearing and China Foreign Exchange Trade System formed a joint venture on June 7 called the Bond Connect Company to offer trading and support services to market participants of the bond connect.

‘Not a Case of Build It and They Will Come’

Beijing hopes demand for bond connect from foreign institutional investors will exceed the lackluster enthusiasm investors currently have for the Hong Kong-Shenzhen stock connection, where trading activity remains tepid.

But that’s far from a certainty.

The Hong Kong-Shenzhen stock connect has been open for six months, but logistical and demand issues remain. Clearing and settlement differences between Shenzhen and Hong Kong regulators have caused a sizable portion of trades to fail in recent months, according to a South China Morning Post report. In addition, foreign demand for Shenzhen stocks so far hasn’t met Beijing’s expectations, with the technology-heavy Shenzhen issuers viewed as perhaps too risky for foreign investors.

It’s difficult to see bonds faring better. Despite Beijing’s opening up the domestic bond market to foreign investors last February—with no approval necessary as long as the investor has a local registered entity—foreign ownership of China’s bond market remains tiny.

At the end of 2016, foreign holdings of onshore bonds are only 1.3 percent of total market value, according to estimates from the Financial Times

That means investors don’t believe the investment returns on Chinese bonds are enough to justify the heightened default risk of owning Chinese debt, which has fueled much of China’s recent economic growth and today sits at almost 260 percent of GDP, according to ratings agency Moody’s Investors Service.  

Looking past macro issues, individual bonds are also notoriously hard to evaluate for foreign investors.

The industry standard global credit rating agencies of Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings are barred from operating in China. Chinese bonds are instead rated by domestic ratings agencies, which are viewed by foreign investors with distrust for granting overly generous credit ratings. In other words, it’s difficult to assess the credit-worthiness of Chinese issuers because information on bonds is unreliable.

Oppenheimer_bonds2

Investors believe Chinese domestic credit rating agencies have tendencies to give out overly generous ratings to bond issuers (Oppenheimer Funds).

“For foreign investors, it’s not a case of build it and they will come,” concluded Rachel Ziemba, Managing Director at Roubini Global Economics, on CNBC. “They want to understand, they want to be paid for the risks they are taking on. In an environment where interest rates are rising in China, where the property market is flattening out a bit, that question mark about more information and drivers is going to be very important.”

The new U.S.-China trade deal signed during Chinese Communist Party leader Xi Jinping’s visit with U.S. President Donald Trump in April outlined a path for the U.S. credit rating agencies to begin operations in China later this year.

To foreign investors, that’s a step in the right direction, while also introducing new challenges. Foreign credit agencies will operate under supervision of Chinese securities regulators. During times of economic duress, can they remain independent and objective?

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Xiao Jianhua, a Chinese-born Canadian billionaire, reads a book outside the International Finance Centre in Hong Kong in December 2013. (AP Photo/Next Magazine)Xiao Jianhua, a Chinese-born Canadian billionaire, reads a book outside the International Finance Centre in Hong Kong in December 2013. (AP Photo/Next Magazine)

Yuan Hongbing is a former Chinese law professor; he now lives in exile, penning books about corruption in China and the Communist Party’s plans to subvert Taiwan. He also maintains a network of contacts in the mainland. In a recent interview with the overseas Chinese-language media outlet Mingjing, Yuan claimed that a well-known Chinese billionaire, Xiao Jianhua, was involved in China’s stock market crash of summer 2015.

Yuan says that he knew Xiao Jianhua from their time together at Peking University, where Xiao was the youngest law student there in 1986, matriculating at age 15. Yuan at the time was part of the university’s faculty, and was director of that year’s law student body. He became acquainted with Xiao and says he even briefly employed him, at Peking University, after Xiao graduated. He said that they stayed in touch for some years afterwards.

In the interview he makes reference to key political figures in China, including Zeng Qinghong, the consigliere to former Party leader Jiang Zemin, Chen Yun, one of the Party’s godfather figures, and many others, all of whom he says Xiao was financially involved with. He claims that Xiao helped to engineer the 2015 stock meltdown as a way of striking back against Wang Qishan’s anti-corruption campaign. Following the crash, numerous figures in the financial sector were hauled in for questioning by anti-corruption investigators. 

Following are translated excerpts from Yuan Hongbing’s interview with Mingjing, published online on May 25.

“Xiao Jianhua was once very close to Zeng Qinghong’s family — Zeng Qinghong’s son is Zeng Wei. He was also very close to Jiang Zemin’s family, as well as Zhang Dejiang’s family, Zhang Gaoli’s family and Liu Yunshan’s family.

“Among families of current and former Politburo members, and current and past standing committee members, the majority used Xiao Jiahua as their front man.

Chinese exile law professor and dissident writer Yuan Hongbing in an undated file photo. (Chen Ming/The Epoch Times)

Chinese exile law professor and dissident writer Yuan Hongbing in an undated file photo. (Chen Ming/The Epoch Times)

“Xiao Jianhua’s influence in the financial sector can be attributed to him getting help from Zeng Qinghong’s son. And his connections with Dai Xianglong and Zhou Xiaochuan were established mainly through the Chen Yun family.

“In China, all of the tens of millions of CCP officials were corrupt, without exception. Crony capitalism itself nurtures corruption. Corrupt officials fall into two groups: non-princelings, such as Guo Boxiong, Xu Caihou, Ling Jihua and Zhou Yongkang, and those princelings who were descendants of CCP generals and provincial level officials from the days when the CCP took power.

“Xi Jinping and Wang Qishan’s anti-corruption sweep has touched upon these families to a certain extent and has threatened the interests of these families. This is the background leading to the 2015 financial coup. The coup was conducted by Xiao Jianhua. When discussing the coup, princelings praised ‘the person from Beijing University’ as being courageous for having this kind of thinking.

“The aim of Xiao Jianhua’s coup was to get Xi Jinping to stop [the anti-corruption campaign] at the right time, or more specifically, to maintain the union of the tens of millions of corrupt officials with the cunning businessmen under the market economy of crony capitalism.

“From another point of view, it was a sign that the CCP’s internal political crisis had reached a critical point. Under the crony capitalist market economy, the union between corrupt officials and immoral businessmen is the political basis of centralized politics. Xiao Jianhua and Guo Wengui, and those who rely on the crony capitalist market economy, have challenged the system and even caused quite a serious threat to it. The current CCP totalitarian regime does not merely suffer from an economic crisis or simple economic corruption, but from political decadence.

“The purpose of the 2015 financial coup was to stop the central anti-corruption policy. More directly, it was about striking out against Wang Qishan.

“Through this financial coup, they wanted to take the power of the modern ‘Eastern Depot’ [in Chinese ‘dong chang’, a reference to a Ming dynasty secret police and spy agency] completely away from Wang Qishan.

“They thought that if Wang Qishan continued on this path, he would directly touch their interests.

“Since the source of corruption is rooted in the CCP’s crony capitalism, by not seeking to free the economic system from corruption, one can see that all anti-corruption efforts are actually just meant to protect the interests of the CCP’s power group.

“Chinese people in China and overseas must get a better understanding of the CCP’s tyranny as the most vicious curse on the Chinese nation. How to end the CCP’s tyranny as soon as possible is in China’s most fundamental political interest. The sooner the CCP ends, the fewer losses for China. If we allow the CCP to exist long-term, China will have no future.”

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  • Category: General

(Shutterstock)(Shutterstock)

Chinese investments in the United States reached a new record in 2016, more than tripling the previous year’s. However, the pace of investments has begun to cool in 2017, following a crackdown in China on capital outflows.

In reaction to massive capital outflows and the resulting downward pressure on the Chinese currency, Beijing tightened its controls on many outbound mergers and acquisitions (M&A) deals, writes research firm Rhodium Group in a recent report.

In particular, outbound investments in real estate, entertainment, and deals outside investors’ core businesses are now under much more scrutiny, and Chinese investors, wary of having their deals struck down by Beijing, have been more reluctant to bid.

With these recent changes, the pace of newly announced investments in the United States has already begun to slow.

“In the first quarter of 2017, the volume of announced acquisitions fell by 20 percent compared to the fourth quarter of 2016. The combined value of announced deals decreased by about half,” stated the Rhodium report.

Chinese Buying Spree

The investment activity that peaked last year started in 2010, when China relaxed rules on outbound investment for institutional investors in order to expand its political and economic influence abroad.

Since 2010, Chinese companies have invested more than $100 billion in the United States across a wide range of industries, with the real estate and hospitality industries attracting nearly 30 percent of the total.

Capital flight from China skyrocketed in 2016 in particular, with mounting economic problems at home and a devaluation of the yuan.

Last year alone, Chinese firms invested a record $46 billion in the United States. The huge jump in investment was driven by a significant number of mega deals, including aviation and shipping giant HNA’s acquisition of U.S. technology and supply chain company Ingram Micro for $6 billion.

The HNA logo is seen on a building in Beijing on Feb. 18, 2016. (GREG BAKER/AFP/Getty Images)

The HNA logo is seen on a building in Beijing on Feb. 18, 2016. (GREG BAKER/AFP/Getty Images)

And U.S. real estate, which is considered a safe haven, was the biggest beneficiary of Chinese investments. The top deals included Anbang’s purchase of 15 properties from Strategic Hotels & Resorts for $5.5 billion and HNA’s $2 billion acquisition of Carlson hotels.

Foreign direct investment by U.S. firms in China, by contrast, stayed flat compared to previous years, at $13.8 billion. Hence, the gap between Chinese investment in the United States and U.S. investment in China widened dramatically last year, stated the Rhodium report.

U.S. Real Estate as Safe Haven

The easing of restrictions over the past few years allowed insurance companies based in China to invest up to 15 percent of their total assets in offshore real estate.

As a result, U.S. real estate, particularly hotels and office spaces, has become attractive for Chinese insurers seeking high returns and portfolio diversification.

Investment in the U.S. real estate market soared after the stock market crash in China in June 2015. The sharp decline in returns at home led investors like Anbang Insurance, China Life Insurance, and Fosun Group to look for safe havens.

However, since the tightening of capital controls in late 2016, “the pace of real estate investment has slowed markedly,” stated the Rhodium report, “but activity has not collapsed.”

There are few pending real estate deals, including HNA’s acquisition of a stake in Hilton for $6.5 billion. HNA also bought 245 Park Ave. in New York for $2.2 billion, one of the highest prices ever paid for a Manhattan office tower.

Uncertainties Ahead

While Chinese investment in the United States continues, it is unlikely to reach the levels seen in 2016, as Chinese investors are now more cautious, according to experts.

“Up until six months ago, corporate investors from China were aggressively outbidding their rivals in cross-border M&A deals,” said a senior executive at a U.S. private equity firm, who wished to remain anonymous.

But for the last six months, investors have been less active, he said. Transaction volume fell by 12 percent in the United States in the first quarter of 2017, according to the real estate firm Jones Lang LaSalle.

“For the first time in two years, New York has lost its spot as the world’s most traded city. Leading the pack is London, regaining the spot it lost in 2015,” said an Jones Lang LaSalle report released in April.

According to another report by real estate brokers Cushman & Wakefield, Beijing is blocking all deals involving investments of more than $10 billion until September 2017, in an effort to regulate international investments.

In 2016, 62 percent of the investments abroad were over $1 billion. Now, M&A transactions valued at more than $1 billion that are outside Chinese investors’ core businesses, and foreign real estate deals by state-owned companies, are being restricted, leading to the investment lag in recent months.

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