A woman walks past a Vanke Service Center in Beijing July 6, 2016.
(STR/AFP/Getty Images)A woman walks past a Vanke Service Center in Beijing July 6, 2016.
(STR/AFP/Getty Images)

The ongoing battle for future of China Vanke Co. Ltd., the world’s biggest residential real estate developer, took a fresh turn as conglomerate Evergrande has emerged as a third major investor in the company.

Vanke has been at the center of a year-long public battle with its No. 1 shareholder Baoneng Group, which owns around 25 percent of Vanke though numerous subsidiaries.

China Evergrande Group, a conglomerate that is part insurance company and part real estate developer—it was the No. 2 developer in China behind Vanke in 2015—said that it recently spent more than $600 million to increase its ownership stake in Vanke to 8.29 percent, according to a regulatory filing last week.

Evergrande, a powerful developer based in the southern city of Guangzhou, has been quietly accumulating Vanke shares and is now the third-biggest shareholder in Vanke behind Baoneng Group and China Resources.

While its intentions are unclear at the moment, Evergrande’s entrance brings further intrigue to the battle for control of one of China’s most visible companies.

Evergrande’s Grand Ambitions

Analysts in Hong Kong expect the company to build up its shares further. Once Evergrande’s holdings in Vanke exceed 10 percent, it will have the right to unilaterally call a shareholders’ meeting in accordance with Vanke’s bylaws.

Evergrande never disclosed the purpose of its investment. But its relatively large stake could allow Evergrande to seek board seats at the next shareholder meeting which is scheduled for March 2017. The meeting could hold the key in determining the future of Vanke, which is currently worth more than $40 billion by market capitalization.

So far, neither Evergrande nor Baoneng has demanded board representation.

CIMB Securities analyst Raymond Cheng told the South China Morning Post last week that if Evergrande can take over Vanke, it would reduce its overall leverage and provide the company with greater access to financing.

But Evergrande is unlikely to have the financial flexibility to take over Vanke. Evergrande itself is already one of the most indebted companies in China—it has accrued $57 billion in debt, almost six times its market cap, to finance corporate and land acquisitions.

Evergrande’s billionaire chairman Hui Ka Yan has led a debt-fueled buying spree over the past year. Its most recent major deal was the $555 million purchase of Shenzhen-based property developer Calxon Group in April.

The purchase should set up the Hong Kong-listed Evergrande nicely for a backdoor stock listing in mainland China. The company announced last month it is targeting a stock listing in Shenzhen by contributing all of its property assets into a newly created China-based company. A mainland listing should help the firm command a higher valuation, boosted by greater interest from Chinese retail investors.

Vanke’s Future Uncertain

Vanke has been at the center of a year-long high-profile control battle with its No. 1 shareholder Baoneng Group, which owns around 25 percent of Vanke though numerous subsidiaries.

In June, Vanke proposed an asset purchase from state-owned Shenzhen Metro Group for around $6.9 billion through new stock issuance to dilute Baoneng and existing shareholders’ ownership. But the issuance was rejected by Baoneng and China Resources.

The ongoing battle for control of Vanke has intrigued market participants due to an almost shocking level of confrontation in a country where private ownership of companies is still maturing and negotiations are done in an orderly manner and behind closed doors. Wang Shi, Vanke’s well-known founder and CEO, called Baoneng a “barbarian,” a reference to the book “Barbarians at the Gate” about the 1988 hostile takeover of RJR Nabisco by private equity giant Kohlberg Kravis Roberts & Co.

Baoneng, for its part, has been vocal in the past about seeking Wang’s ouster.

Stakes are also high for the Chinese Communist party in the Vanke fight. The showdown will test resolve of the Communist party to stand pat and let market forces resolve the situation, one way or another.

Wang Shi is a celebrity with a rock star-like reputation, and one of China’s first-generation entrepreneurs who is synonymous with the rise of Shenzhen as a business hub. How the Chinese regime handles a possible downfall of one of China’s most successful businessman will reveal much about its market intentions.

He founded Vanke in 1984 as a private trading company under a government agency. Four years later, Vanke became one of the first companies in Communist China history to restructure into a private holding corporation. In the following decades, Wang carefully managed his relationship with local and regional Communist party organs. Vanke largely followed party blueprints to develop and build homes and apartments across China during the real estate boom.

To avoid suspicion from the Community Party as he and the company rose to prominence, Wang held less than 0.1 percent of Vanke’s shares. Instead, the company relied on state-owned organizations as top shareholders—such as China Resources—to support Wang’s position.

But that strategy has backfired. Wang’s minimal ownership in the company he founded has left Vanke vulnerable to outside takeover.

So far, Beijing has only made cursory announcements regarding the Vanke saga. In July, China’s top securities regulator, the China Securities Regulatory Commission (CSRC) criticized both Vanke management and its shareholders. The CSRC implored the parties to find common ground, warning that any illegal actions would be punished.

CSRC has not made further comments about Vanke’s shareholder battle since.

As for Evergrande, its insurance arm Evergrande Life has attracted the attention of the China Insurance Regulatory Commission (CIRC). The regulator “explicitly expressed its unsupportive stance” regarding Evergrande Life’s tendency to use its insurance deposits to speculatively trade stocks, according to a posting on CIRC’s website.

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Customers and real estate agents look at several building models at a real estate exhibition in Jiashan, Zhejiang province, in a file photo. (AFP/AFP/Getty Images)Customers and real estate agents look at several building models at a real estate exhibition in Jiashan, Zhejiang province, in a file photo. (AFP/AFP/Getty Images)

When China’s richest man and its most successful real estate developer calls the country’s overheating property market “the biggest bubble in history,” it’s probably not a good sign.

But that’s exactly what Wang Jianlin, billionaire owner of Dalian Wanda Group and Communist Party insider, said in an interview with CNN last week. “The government has come up with all sorts of measures—limiting purchase or credit—but none have worked,” he told CNN.

Average new housing prices across China increased 1.3 percent in August from July, according to state data, which was the 17th consecutive monthly jump. September was also the biggest one month increase since early 2011.

The Shanghai Composite Index has declined 15 percent since Jan. 1. If the trend continues, 2016 would be the biggest drop in five years. But volume on the exchange is also down—to the lowest level in two years—signaling that investors are pouring their money elsewhere after the scare of last year’s market crash.

In 2016, China’s property sector has been the biggest beneficiary.

At a macro level, Chinese retail investors are akin to children at a soccer match; they’ll simply swarm to where the action is. And over the last several years, the action mostly seesawed between equities and real estate, with an occasional interest in commodities.

Real estate is the hot market right now, to the point where experts—inside and outside China—are sounding the alarm.  

Ma Jun, chief economist at the People’s Bank of China’s research arm, recently called the property market a bubble in an interview earlier this month with Yicai.com.

People’s Daily, the Chinese Communist regime’s mouthpiece, published an editorial last week expressing deep concern about the frothing property market. “Looking at the current average price [of real estate] and personal income in Shenzhen, it would take an average person more than 1,200 months—that is, 100 years—of not eating or drinking to afford a 90 square-meter house,” wrote investor Tang Jun, regarding the unaffordability of Shenzhen real estate.

“China has become an economic power, but the real estate market is a landmine, and the most frightening is that no one knows when it will detonate.”

Dangerous Business Model

Low interest rates mean that even cash-strapped developers can leverage up by way of the relatively cheap onshore bond market. And property developers have been aggressive, putting little thought into their land purchases.

Economists at Deutsche Bank AG pointed out that a “clear sign of a bubble” rests in the fact that land auction prices have become so inflated that the business models of new developments only make economic sense if property prices keep rising at today’s pace.

It’s a line of thinking prevalent amongst investors before the U.S. mortgage crisis a decade ago, where lenders disregarded risks of default or foreclosure by assuming the ever-rising housing prices would cover any losses.

Deutsche_Bank_ChinaHousing

Price sensitivity of recent land auctions in top 10 Chinese cities. (Deutsche Bank)

After studying recent land auction prices at ten major cities, Deutsche Bank analysts believe that if real estate prices remain flat from today, half of current developments would lose money. Zhang Ziwei, Deutsche’s chief China economist, thinks a severe correction could arrive in 2018.

Regime Ambivalence

But the Chinese Communist regime has been halfhearted, at best, when trying to tame the market.

Local and regional governments instituted tightening measures at the transactional level such as capping prices, limiting the number of properties per household, and restricting non-local buyers from purchasing by closely examining residence (“hukou”) records.

Localities have taken different approaches. Shanghai, for example, decided to suspend land auctions. Other cities, such as Guangzhou, chose to cap prices. The tactics largely backfired as determined buyers found other channels to secure real estate.

The issue is that authorities have been reluctant to address a main cause of rising housing prices—easy money.

Much of the easy credit has been tied up in the real estate market. State data showed that in August, 71 percent of new bank loans went to household mortgages, instead of to the small to medium-sized businesses whom Beijing hopes would drive the economy.

Authorities have been reluctant to address a main cause of rising housing prices—easy money.

But it’s too simple to lay the blame on rate and regulatory policy nationally—China is increasingly a country with two divergent economies.

Much of the talk regarding a real estate bubble is in regards to Tier-1/Tier-2 cities and China’s coastal regions where real estate is perceived as safer, relative to other onshore investments.

Elsewhere in China, there is excess inventory and the housing market is mired in a years-long slump. This is especially true in Northern and Northeastern China where the economy—reliant upon coal and steel industries—has been in decline.

After years of overbuilding, provinces of Inner Mongolia, Liaoning, and Jilin all have supply-to-sales ratios of more than four years, according to London-based Lombard Street Research. That means it would take more than four years to sell the number of available homes, at current rate, assuming no new properties would be built. That same metric in the United States is 4.6 months as of August, according to data from the St. Louis Fed.

LSR_ChinaProvinces

China real estate supply-to-sales ratios by province. (Lombard Street Research)

“Provinces with severe overbuilding (with an excess supply-to-sales ratio of more than three years) accounted for 20% of total residential investment over the past five years,” wrote Michelle Lam of Lombard in a research note.

“Housing construction in those provinces has already shrunk over the last two years and will continue to contract for another couple of years, acting as a significant drag on overall residential investment growth.”

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A sign hangs on One Chase Plaza in lower Manhattan on Oct. 14, 2014 in New York City. The iconic building is owned by a Chinese private equity firm as part of its overseas investment strategy.  (Spencer Platt/Getty Images)A sign hangs on One Chase Plaza in lower Manhattan on Oct. 14, 2014 in New York City. The iconic building is owned by a Chinese private equity firm as part of its overseas investment strategy.  (Spencer Platt/Getty Images)

Chinese investments in the United States reached a new record level of $18.4 billion in the first half of 2016, up three times compared to the same period last year, and even higher than all of last year ($15.3 billion).

Strong mergers and acquisitions activity accounted for the majority of the incoming Chinese capital, said research firm Rhodium Group.

With the stock market crash in China that began in June 2015, the flow of outbound investment from China to the rest of the world soared. With growing uncertainty about exchange rates and the economic and political outlook, investors are seeking to stash away capital in safe havens like the United States.

“The rapid growth of Chinese outbound (Foreign Direct Investment) FDI in the first half of 2016 has triggered political reactions both in China and host economies,” Rhodium stated.

Screen Shot 2016-07-25 at 2.07.01 PM

This capital flight has led to a further deepening of FDI deficit in China’s balance of payments. So Chinese regulators are increasing their scrutiny of outbound investment transactions.

“China’s leadership continues to pledge its commitment to further external liberalization, but concerns about capital outflows have clearly grown and the State Administration of Foreign Exchange (SAFE) and other regulators have taken informal steps in recent months to ‘manage’ the outflow of foreign exchange,” the research firm said.

The appetite of private Chinese companies for U.S. investments remains high.

—  Rhodium Group

This has increased concerns about the ability of Chinese companies to close deals, driving up risk premiums and reverse break fees for Chinese buyers.

A sharp uptick in the Chinese deal-making activity in the United States is also keeping U.S. regulators busy.

The Committee on Foreign Investment in the United States (CFIUS), reviews foreign acquisitions for national security threats and China for the last few years has been in the top spot for covered transactions (transactions that result or could result in control of a U.S. business by a foreign person).

A number of transactions have run into delays because of CFIUS and other regulatory reviews including Syngenta, Ironshore, Fidelity & Guaranty Life, according to the Rhodium report.

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Strategic Versus Financial Investments

The Chinese investments in the United States in 2016 were spread across a wide range of sectors including entertainment, consumer products and services, technology, and automotive.

Besides M&A activity, Greenfield projects, where companies start building their operations from scratch, were also strong, driven by capital-intensive projects in real estate and manufacturing.

More than 80 percent of all Chinese FDI transactions in the United States in 2016 are considered as strategic investments (firms investing in their core areas of business). The largest strategic investment was Haier’s acquisition of GE’s home appliances business for $5.6 billion, in consumer products sector. And the second largest was Wanda’s purchase of Legendary Entertainment for $3.5 billion, in the entertainment sector.

Other sectors attracting large investments include information and communication technologies (acquisition of Omnivision Technologies by a Chinese consortium for $1.9 billion) and automotive (Ningbo Joyson’s acquisition of Key Safety Systems for $920 million).

Financial investments (investments for financial returns) amounted to $3.5 billion, or 20 percent of total investment in 2016, according to Rhodium. Most of them were driven by private investors buying commercial real estate assets in major coastal cities.

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Outlook

The value of announced but not yet completed Chinese investments was still close to an all-time high of $33 billion at the end of June 2016, according to the report. Major M&A transactions include HNA Group’s $6 billion bid for technology distributor Ingram Micro, Anbang’s $6.5 billion acquisition of Strategic Hotels & Resorts, and Apex Technology’s acquisition of Lexmark for $3.6 billion.

There are also pending investment in real estate development projects in New York and California.

“The appetite of private Chinese companies for U.S. investments remains high. … It is reasonable to assume that recent geopolitical shocks (Brexit) and related USD strength will aggravate capital outflows in coming months,” Rhodium said.

“This makes it likely that regulators will continue or even increase scrutiny of outbound FDI transactions, particularly for deals involving large amounts of foreign exchange and those with a financial nature.”

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China Vanke Chairman Wang Shi speaks at the 2013 World Economic Forum, in Davos. Wang is has been in the midst of a drawn-out fight with Vanke's largest shareholder over control of the company. (AP Photo/Michel Euler)China Vanke Chairman Wang Shi speaks at the 2013 World Economic Forum, in Davos. Wang is has been in the midst of a drawn-out fight with Vanke's largest shareholder over control of the company. (AP Photo/Michel Euler)

China Vanke Co. Ltd., the world’s biggest residential real estate developer, has doubled down on efforts to blunt its top shareholder in an ongoing fight for control of the company.

The company—one of China’s most well-known firms—has been mired in an eight-month long dispute with No. 1 shareholder Baoneng Group, after the little-known insurance company began to amass Vanke shares late last year. Baoneng’s goal is to wrest control of Vanke from Wang Shi, the company’s founder and chairman.

Vanke’s latest gambit was a proposed asset purchase in Shenzhen via new stock issuance that would dilute current shareholders in an effort to stave off Baoneng’s increasing influence. Vanke’s future could come down to an investor vote of the plan.

The shareholder battle has intrigued market participants due to an almost shocking level of confrontation in a country where private ownership of companies is still maturing and negotiations are done orderly and behind closed doors. Wang called Baoneng a “barbarian,” a reference to the 1988 hostile takeover of RJR Nabisco by Kohlberg Kravis Roberts & Co. In turn, Baoneng accursed Wang of not putting shareholders first and sought his ouster from Vanke’s board.

A Shenzhen Gambit

Vanke’s latest maneuver is a purchase of assets from state-owned Shenzhen Metro Group for 45.6 billion yuan ($6.9 billion) through new stock issuance. Vanke’s stock sale would dilute Baoneng and other investors’ ownership stakes. If approved, Shenzhen’s subway operator would assume the title of single largest shareholder, surpassing Baoneng’s stake.

In a statement last week, Vanke said that if the deal consummates, Shenzhen Metro would hold 20.65 percent of its shares, exceeding Baoneng’s 19.27 percent after dilution. Before the sale, Baoneng through several subsidiaries and affiliates, have accumulated close to 25 percent of Vanke’s outstanding shares.

Vanke’s stock sale would dilute Baoneng and other investors’ ownership stakes.

The deal, and more importantly investor dilution, is critical for Vanke in its fight with Baoneng. “For our firm, the deal is not like icing on a cake, it’s a crucial matter to our future,” Vanke Senior Vice President Tan Huajie told investors in a transcript acquired by Bloomberg.

But approval of the deal is far from a guarantee. Vanke’s second biggest shareholder and long-time ally is state-owned China Resources Group, which owns a 15 percent stake in Vanke before dilution.

While initially wary of Baoneng’s share purchase, China Resources has since sided with Baoneng in criticizing Vanke’s recent maneuvers. China Resources also plans to vote against Vanke’s proposal to purchase the Shenzhen Metro assets, viewing it as a ploy to hurt current shareholders. China Resources Chairman Fu Yuning called the move “unfortunate” as the plan was never brought up to be discussed with the board.

Combined, Baoneng and China Resources own around 40 percent of Vanke’s shares prior to dilution and represent a formidable challenge for Vanke’s plans.

Ironically, more than 15 years ago it was China Resources that came to Vanke’s rescue as it fought off a similar shareholder takeover situation.

Baoneng Under Pressure

Baoneng also faces its share of challenges.

Wang criticized Baoneng and its affiliates for excess use of leverage. Vanke sent a letter to regulators earlier this year alleging that Baoneng used structured debt vehicles and sold high-yield wealth management products to accumulate its stake in Vanke.

The use of leverage could have negative impact on Baoneng’s financial health. Since Vanke shares resumed trading on July 4—it had been suspended on the Shenzhen Stock Exchange since Dec. 18, 2015—its value has fallen more than 20 percent to 17.39 yuan ($2.60).

If Vanke shares continue to fall, Baoneng could face margin calls on its position and may be forced to liquidate some of its holdings to pay back debt.

Baoneng could also draw increasing scrutiny from insurance regulators. At an industry conference last Thursday, China Insurance Regulatory Commission Chairman Xiang Junbo stressed that policyholder and investor protection are top-of-mind for the regulator, warning insurers to refrain from selling wealth management products to finance risky asset purchases.

A Test for ‘Capitalism’

To Western observers, the Vanke-Baoneng takeover battle seems routine. Activist investors such as Carl Icahn and Daniel Loeb shaking up corporate boards is commonplace in the United States.

Stakes are high for the Chinese Communist party in the Vanke fight.

But the showdown over Vanke is a rarity in the Chinese markets, where the ruling Communist Party craves stability and control above all. But in recent years, regulators have stepped up rhetoric about letting free market forces play a more decisive role in shaping the country’s financial markets.

Stakes are high for the Chinese Communist party in the Vanke fight. For one, this showdown will test resolve of the Communist party to stand pat and let market forces resolve the situation, one way or another.

Secondly, Wang Shi is a celebrity with a rock star-like reputation, and one of China’s first-generation entrepreneurs who is synonymous with the rise of Shenzhen into a business hub. He founded Vanke in 1984 as a private trading company under a government agency. Four years later, Vanke became one of the first companies in Communist China history to restructure into a private holding corporation.

After the Tiananmen Square crackdown of June 4, 1989, Wang helped several democracy activists escape to Hong Kong. He was detained for almost a year for assisting in the activism, a person familiar with his background told the Wall Street Journal in a 2014 interview.

In the following decades, Wang carefully managed his relationship with local and regional Communist party organs. Vanke largely followed party blueprints to develop and build homes and apartments across China during the real estate boom.

To avoid suspicion from the Community party as he and the company rose to prominence, Wang held less than 0.1 percent of Vanke’s shares. Instead, the company has relied on state-owned organizations as top shareholders—such as China Resources—to support Wang’s position. But this strategy also left Vanke vulnerable to outside takeover.

While Beijing has kept a watchful and wary eye towards the saga playing out in Shenzhen—where both Baoneng and Vanke call home—it had not intervened directly.

Until now.

China’s top securities regulator, the China Securities Regulatory Commission (CSRC), gave indications of intervention last week after staying on the sidelines for more than half a year. The CSRC criticized both Vanke management and shareholders, and warned that any illegal actions would be punished although it did not cite what would constitute illegal actions.

“Vanke and shareholders not introduced any concrete plans to resolve their differences,” a posting on CSRC’s Weibo account read last week. “Instead their conflict has intensified, not regarding capital market stability, the interests of the company, nor those of small investors.”

The CSRC set up a task force to investigate the Vanke saga, according to Chinese business journal Caixin citing unnamed sources close to the situation. A separate notice released by China’s securities regulator says Vanke and its top shareholder both violated disclosure requirements on major shareholder changes.

Regulators’ scrutiny around the transaction and a pending shareholder vote likely means that for better or for worse, the Vanke shareholder battle could be nearing its endgame.

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Feb. 8 is Chinese New Year—the biggest holiday of the year for Chinese families. Thus the end of the year is usually when migrant workers in China start heading home for family gatherings and reunion feasts. But many have had to delay their return dates this year after not getting paid for months of work, especially those in the construction industry.
“One day passes after another; I haven’t got my salary for four months,” Luo Yixue, a migrant worker from Sichuan Province, told Xinhua, China’s official state media. With wages long overdue, Luo can’t even pull enough money together for a ticket home.
Over two weeks in December, the High People’s Court in Henan, a province in central China, heard over 6,700 cases involving about 10,000 migrant workers who were owed a total of $48 million in back wages.
Two nine-story commercial buildings near completion stand imposingly on a street in Zhengzhou City. At their base, are the shabby homes of the construction workers who erected them. Luo and the others haven’t been paid since Aug. 20, and although the construction work has been done for four months, they haven’t left, still waiting for the over $9,000 they’re collectively owed.
“My boss has only given me $154 in living expenses since August,” said Luo. “We can only buy those cheap vegetables, or pick up discarded vegetable leaves in the market. Every one of us spends less than $1.54 a day.”
Luo says he feels sad when looking up at the new buildings, in contrast to the happiness he felt when the project began, knowing money would be coming in. He never expected that he wouldn’t be paid and his labors would be in vain.
This problem has been there for a long time, as migrant workers are the weakest group in society.— Huang Qi, Rights activist

Huang Qi, a rights activist in Sichuan Province, told Radio Free Asia that this has become a common phenomenon nationwide.
“This problem has been there for a long time, as migrant workers are the weakest group in society, whose legal rights cannot be assured. Employers and supervisors dare to delay paying salaries because they have behind the scenes backers.”
Yu Dandan, a lawyer with Dacheng law firm in Beijing, told Xinhua there are many migrant workers who don’t have formal paperwork or contracts. So once their payments are delayed, the lack of a proper certificate of employment and the long process for making an appeal makes it hard for migrant workers to defend their rights.
Moreover, because labor supervision is divorced from actual employment, government agencies pass the buck back and forth, making it even harder for workers to collect back wages.
Construction workers are particularly vulnerable to this problem. As Huang pointed out, the real estate market in China is not doing well. Many real estate companies sink whatever funds they have into purchasing land, thus construction costs can’t be cleared until the buildings are sold. As a result, withholding payment to vulnerable migrant workers like Luo has become increasingly common practice.

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Mr. Sun never imagined he would end up protesting outside local government offices in Wuhan, the capital city of Hubei Province, after he put his money in the largest financial management company in central China. But after the firm, Wuhan Wealth Cornerstone Investment Management (Wuhan Caifu Jishi), announced a default on Nov. 24, thousands took to the streets in protest.
The firm was defaulting on a “wealth management product” (WMP), a high-yield financial instrument, after a project the capital was invested in ran short of funds. The product had collected about 5 billion yuan ($782 million) from over 70,000 investors, according to one of the investors speaking to China Business Journal.
WMPs, as they’re called, are attractive because they offer returns markedly higher than the 3 percent maximum rates that state banks give for deposits. Certain products offer annual interest rates of 5 percent, or even promise short-term returns of over 10 percent.
My son is getting married soon, what should I do?— Chinese investor

Protesters in the current incident are mainly Wuhan-based retirees who had invested their life savings into the company’s product. Some received a small stream of payments, while more recent participants saw no returns, according to accounts by investors. The day after the default, they stormed out in the bitter Wuhan cold with banners and placards to petition Wealth Cornerstone and the local authorities to resolve the issue. Cries of “return our money!” rang out. About 1,000 armed police were mobilized to suppress the protesters, and eight petitioner representatives have since been arrested, according to accounts by participants.
The protest in Wuhan highlights the dangers of investing in wealth management products in China, and shows the dubious link between local Communist Party officials and finance companies. The protest also hints at potential social unrest, always bubbling beneath the surface, that could be set off by continued corporate defaults as China’s economy slows down.
Mr. Sun, who describes himself as prudent, was convinced by a friend who worked at the company that the product, which offered 8.8 percent annual interest, was a risk-free investment.
He invested 600,000 yuan ($94,000) three months ago, he said in an interview with the Epoch Times, and has yet to receive a payment. An earlier investor put in the 250,000 yuan he had set aside for his son’s wedding, but stopped receiving payments on Nov. 20, according to China Business Journal, a state-funded publication.
“My son is getting married soon, what should I do?” the investor said.
WMPs sound too good to be true precisely because they are, according to Xiao Gang, the chairman of the Chinese regime’s securities regulatory commission.
In an October 2012 op-ed published in the state-run China Daily, Xiao explained that banks and investment companies rely on “some empty real estate property or long-term infrastructure,” or even high-risk projects to generate cash flows for their WMP investors. If those projects face liquidity problems, banks and companies then sell more WMPs to pay their long-time investors first. Xiao Gang called the process “fundamentally a Ponzi scheme.”
MORE:Is the Chinese Economy a Ponzi Scheme?This Time Is Not Different: China Faces ‘Internal Debt Crisis’—Carmen ReinhartThe Unregulated World of Shadow Banking
WMPs are part of China’s shadow banking system, which is unregulated, often riskier, and more opaque than traditional banking.
Founded in 2012, Wuhan Wealth Cornerstone is linked to Wuhan Huashi International Group, which was established in 1993 and has assets in the tens of billions of yuan and employs nearly 1,000.
Although Huashi describes its relationship with Wuhan Wealth Cornerstone as a “partnership” on its website, Wuhan locals believe that Wuhan Wealth Cornerstone is merely a shell company that is being used by Huashi to finance its other projects.
One investor, who declined to be named for fear of repercussions, claimed in a telephone interview with the Epoch Times that Wuhan Wealth Cornerstone’s default is the result of a shady deal between a government official and the boss of a private company.
The investor believes that Huashi’s executive owes money to organized crime in China, and has now come under Party surveillance because if the news were to leak, many officials would be embroiled in the scandal.
“Has the boss … left Chinese citizens to foot the bill?” the investor asked. The individual indicated he was repeating what he’d heard from other investors, and was unable to substantiate the claims.
The chairman of the board of the Huashi International Group, Li Wenhua, is a member of the Hubei Chinese People’s Political Consultative Conference, a kind of Party-controlled advisory body, and is the vice president of Hubei’s Chamber of Commerce.
Thousands of protesters were still on the streets on Nov. 28, even after security forces had been sent to shut them down.
The protesters may be banking on local authorities buckling to the pressure and bailing out the firm. While this would placate the current crowd, it would also reinforce the moral hazard in the banking sector, where all players expect they can lend with impunity, because the state will step in at the end of the day to stave off social unrest. This, however, would only prolong the time until a general debt crisis.

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  • Author: <a href="http://www.theepochtimes.com/n3/author/larry-ong/" rel="author">Larry Ong</a>, <a href="http://www.theepochtimes.com/" title="Epoch Times" rel="publisher">Epoch Times</a> and <a href="http://www.theepochtimes.com/n3/author/juliet-song/" rel="author">Juliet Song</a> <a href="http://EpochTimes" title="" rel="publisher"></a>
  • Category: General

NEW YORK—A weaker and more volatile Chinese economy has triggered high levels of capital outflow from the country, and so far, the United States has been the prime beneficiary. 
The Chinese overseas investment spree started in 2010, motivated by the shift in the Chinese regime’s policy to promote outbound investments. Since then, a total of $50 billion has been invested by Chinese companies across a wide range of U.S. industries, with real estate attracting $10 billion.
With the stock market crash in China that began in June 2015, Chinese are investing even more in U.S. real estate, which is considered a safe haven by investors. 
“Money coming in from China is as strong as it has been. We feel very optimistic that the trend will continue,” said Kathyrn A. Korte, President and CEO of Sotheby’s International Realty.
Chinese investors have been riding the U.S. commercial and residential real estate waves in recent years. Real estate represented nearly 25 percent of all cross border capital investment in the United States in 2014, according to Asian Real Estate Association of America (AREAA) that hosted the “East Meets West—Manhattan Luxury Real Estate Connect” conference on Nov. 2.
Sun Yun, head of network research at Financial Times, said during a panel discussion at the conference that over the past 30 years, Chinese people have accumulated a huge amount of wealth and the majority of that wealth was invested domestically in fund management firms, mines, and properties.
Now the tide has turned.
“The sharp decline in returns at home lead institutional investors and individuals to diversify their investments and look for safe havens. This is very good news for the New York real estate market,” said Yun.
The most attractive real estate destinations for Chinese investors are New York, London, Los Angeles, San Fransisco, and Tokyo according to Christine Zhang from Bank of China. New York and London have replaced Shanghai and Hong Kong, which used to be top destinations for mainland Chinese investors. And in recent months, Houston real estate has become highly attractive as well.
David Friedman, President of Wealth-X called Houston, Texas the new emerging market due to its high appeal to Chinese investors.  
So far, the top properties for Chinese investors in the United States have been high-end trophy properties, office spaces, and hotels. Wealthy Chinese were also the largest group of foreign investors in U.S. homes and condominiums in 2014, according to the U.S. National Homebuyers Association.
Chinese investors have started to look for opportunities across a wider range of geographies and a greater variety of asset types with a growing number of Chinese middle class now becoming investors. 
The Brooklyn Bridge and the Manhattan skyline at sunset on Dec. 18, 2011. (Benjamin Chasteen/Epoch Times)
Rise of Chinese Middle Class
Growth of the Chinese middle class is also expected to drive outbound investment over the next few years. According to Yun, half of families in Shanghai own more than one house.
Real estate reform in 1998 allowed Chinese residents to purchase houses at very low prices, leading many to purchase multiple homes.
“There is a huge population of homeowners in the big cities where the prices have gone up. And the average value of apartments is $500,000,” said Yu.
This high level of home ownership has meant Chinese can now sell off their second or third house and transfer the released funds to overseas. In addition, overseas education is gaining momentum with more middle class willing to send their kids abroad. This trend will provide a support to the U.S. real estate in the next few year, said Yu. 
The average home purchase price by Chinese in the United States was around $830,000 as of March 2015, according to National Association of Realtors (NAR). 
However, recently there has been an increase in lower price transactions, which is seen as a sign that more middle class Chinese are investing in the U.S. market. 
“We see a lot more investors buying in lower price ranges at $2,000-$3,000 per square foot versus the very high-end trophy properties,” said Korte.
Policy Liberation Fuels Investments
Another factor driving growth is the new policy implemented by Beijing that abolished regulatory approvals for most outbound investments, the Qualified Domestic Institutional Investor (QDII) scheme. The scheme currently allows investors to invest in foreign securities markets via fund management institutions.
China is expected to launch a new pilot scheme called QDII2 allowing individuals to invest directly overseas. It will initially be launched in six key cities: Shanghai, Tianjin, Chongqing, Wuhan, Shenzhen, and Wenzhou. Individuals with at least 1 million yuan ($160,000) in financial assets will be allowed to participate.
“If this scheme is launched you will see more investors coming to United States and spending more money on real estate,” said Savio Chan, CEO of US China Partners.
The Chinese regime has been promoting outbound investments to expand its political and economic influence abroad, according to Yu.

Tip of the Iceberg
Another significant segment of investors in the U.S. real estate market are Chinese students.
“China had one child policy for 30 years. One child has a lot of power. They travel and study abroad. And they buy everything to enhance their face” said Chan, who is also the co-author of the book “China’s Super Consumers.”
There are more than 250,000 Chinese university students studying in the United States. International students make up 7 percent of the foreign investment in the U.S. real estate market, according to Chan.
“We only see the tip of the iceberg,” said Henry Tang, Managing Director of Clarett International. In addition to the big potential he sees from Chinese students, he expects more developers from China to invest in U.S. real estate in the future.
According to a study by Cornell University, the Manhattan real estate market tops the list of Asian Capital investment in the United States. Manhattan attracted more than $10 billion Asian investment between 2013 and 2015, followed by Hawaii ($4 billion), Los Angeles ($4 billion), and San Francisco ($1.3 billion)
Creative Financing Through EB-5
Yet another source of growth for the U.S. real estate market are the funds coming though the EB-5 program. Since access to bank loans is getting harder, developers are using the EB-5 money more as a new source of financing.
EB-5 program enables foreign nationals to obtain U.S. permanent-resident status by investing in a U.S. business that creates jobs.
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