The landmark Waldorf Astoria hotel on Park Avenue, New York City, was sold to Beijing-based Anbang Insurance Group for $1.95 billion in 2014. (Spencer Platt/Getty Images)The landmark Waldorf Astoria hotel on Park Avenue, New York City, was sold to Beijing-based Anbang Insurance Group for $1.95 billion in 2014. (Spencer Platt/Getty Images)

China’s military does not yet have the capability to deploy its power quickly on a global scale. But economically, it’s well on its way.

Chinese companies are quickly—and quietly—amassing assets abroad. China’s outbound M&A activity for the first nine months of 2016 totaled $174 billion, according to Dealogic data, surpassing that of the United States for the first time.

The breadth of Chinese M&A has been growing beyond traditional resource-related industries into high technology, transportation, media, and consumer products. The state-sanctioned expansion of Chinese companies aims to deploy Beijing’s soft power and grow its influence over global consumers.

The recent acquisitions aren’t driven by state-owned enterprises. More recent expansion has an eye towards an economic shift away from resources to value-added growth and services sectors. A handful of private companies are leading the charge, led by bold entrepreneurs and backed by creative financing.

“Because of rising labor costs in China, companies in the country are eager to migrate to high-value-added production and expand their presence, especially to emerging markets,” according to a Moody’s Investors’ Service research report last week.

We take a look at the five Chinese companies—all privately owned but well connected with the Chinese Communist regime—on the forefront of China’s global expansion.

Anbang Insurance

Anbang Insurance Group’s first foray into international spotlight was its failed $14 billion bid to purchase Starwood Hotels and Resorts.

But that hasn’t stopped Anbang from leaving a mark in the U.S. hotels business. It recently closed on a $6.5 billion portfolio of 16 luxury hotels across the country—including the iconic JW Marriott Essex House on Central Park South—previously held by U.S. private equity firm Blackstone Group. It was the most expensive real estate deal by a Chinese company ever.

Anbang’s in the midst of a $13.5 billion shopping spree dating back to 2014, beginning with a $2 billion purchase of the Waldorf-Astoria hotel in Manhattan. The acquisitions spanned companies and properties from South Korea to the Netherlands. 

Anbang is a private financial services company that’s little known until recently even in China. It began operations only 12 years ago as a regional insurance company based in Beijing. Recent insurance sales have given the company the premiums to backstop its acquisitions. But unlike most insurers who invest in bonds, much of Anbang’s assets are tied up in long term illiquid properties that could put the company in a liquidity bind should liabilities become due unexpectedly.

Another mystery is Anbang’s ownership. The company’s ownership structure contains dozens of layers of entities owned by various people from far flung places. But they all have one thing in common of being relatives or business associates of Anbang Chairman Wu Xiaohui, according to a recent New York Times report. Wu, whose wife is the granddaughter of 1980s Communist Party secretary Deng Xiaoping, is curiously not listed as a shareholder of the company. Anbang has since refuted the report.

WH Group

Few U.S. consumers are aware that China’s WH Group is a supermarket staple in the United States.

WH Group owns two main subsidiaries Shuanghui Development and Smithfield Foods, making it the world’s largest pork producer and China’s biggest meat producer.

The company is results of Shuanghui’s $7.1 billion hostile takeover of American pork producer Smithfield Foods, which owns food brands such as Farmland Pork, Nathan’s Famous, and its namesake Smithfield. The deal brought more U.S.-produced pork and pork products to China, where food safety has become an issue in recent years.

Chinese officials last month partially lifted a 13-year ban of U.S. beef, allowing certain beef imports from cattle younger than 30 months.

Smithfield_people

(L to R) Chairman of WH Group Wan Long, President of Smithfield Foods Larry Pope and Smithfield CFO Kenneth Sullivan at a press conference in Hong Kong on April 14, 2014. (Philippe Lopez/AFP/Getty Images)

The ban is politically motivated, given the notoriety of China’s meat market for tainted products. China’s U.S. beef import embargo was initiated after a brief 2003 mad-cow disease outbreak in the United States and has become unpopular with Chinese consumers.

“You should ask the central government the reason for the ban and the reason for lifting it,” Vice Chairman of China Meat Association Chen Wei told TIME magazine. “Because of the ban, we were not able to communicate with our American peers. Now we can.”

The cooperation could open the door for future takeovers as China’s demand for higher quality meat product grows.

Dalian Wanda

Dalian Wanda Group’s aggressive expansion into Hollywood has caught the attention of Washington politicians after its recent purchase of production house Legendary Entertainment for $3.5 billion, becoming the first Chinese company to own a major American film company.

Wanda is a Chinese real estate developer which has quickly expanded its business holdings in recent years. Its first major international purchase was AMC Theaters in 2012, and has since snapped up entertainment ventures both in the United States and China. Wanda’s recent activities include negotiations to buy Carmike Cinemas to become the biggest movie theater owner in the U.S., and discussions to acquire Hollywood producer Dick Clark Productions.

Wanda

Dalian Wanda Group business composition (Nikkei)

This summer Wanda was close to finalizing a purchase of a 49 percent stake in “Big Six” studio Paramount Pictures. The deal fell through due to resistance from Summer Redstone and his family who control Paramount’s parent Viacom Inc.

Wanda’s aggressive expansion into Hollywood has raised concerns about China exporting its propaganda abroad. Wanda is owned by Wang Jianlin, China’s richest man and a Communist Party insider. The company isn’t publicly listed and has a complex operating structure. What’s not complex is its open desire to spread the influence of modern China.

It declared open war on The Walt Disney Co. by planning to open 15 multi-billion-dollar theme parks across China in an effort to deflect attention from Disney’s new Shanghai complex. A few—including massive parks in Nanchang, Jiangxi Province and Hebei, Anhui Province—are already in operation. “Disney really shouldn’t have entered the mainland. We will make Disney’s China venture unprofitable in the next 10 to 20 years,” Wand said in a CCTV interview earlier this year.

Fosun International

Fosun is a Shanghai-based private investment holding company and was one of the first Chinese investors in foreign assets. Founded by billionaire Guo Guangcheng and three of his classmates from Fudan University, Fosun has a diversified portfolio of assets, including well-known foreign assets such as vacation resort operator Club Med, circus performance troupe Cirque du Soleil, accessory maker Folli Follie, women’s fashion label St. John, and downtown Manhattan skyscraper One Chase Manhattan Plaza.

Guo is a self-prescribed student of American investor Warren Buffett and uses an asset base of insurance companies from which to invest in companies. Fosun is generally a prudent investor and employs value investing. In fact, Fosun has recent put up a few of its assets for sale—worth billions of dollars—in order to pay down debts, and Guo has gone on record to imply that valuations may be getting too high. “When everyone gets excited, we become more cautious,” he told the Wall Street Journal earlier this year.

Guo_Guangcheng

Fosun International founder and chairman Guo Guangcheng (STR/AFP/Getty Images)

Guo disappeared for a few weeks in December 2015, and was said to be in official custody. The news sent Fosun’s stock and bond prices tumbling, but they’ve largely recovered since as Guo was released and was even allowed to travel overseas. Some Chinese political analysts wondered if Guo had been caught up in Communist Party regime leader Xi Jinping’s anti-corruption sweep given his connections to Shanghai. Since his release, Guo has refused to discuss details of his detention.

Nevertheless, Fosun is continuing its overseas shopping spree in markets it views as undervalued. It’s currently in the running to place final bids for part of National Grid’s UK gas distribution business, and Fosun recently announced $1 billion commitment to form a commercial real estate investment trust in India.

HNA Group

HNA Group flies under the radar—literally—of casual Western observers, but the private Chinese holding company is quietly building a sprawling aviation, logistics, and hospitality empire.

HNA is the parent of Hainan Airlines, a Chinese airline that predominantly focuses on domestic routes and is based in the Southern vacation Province of Hainan. The company was built by Chen Feng, a former People’s Liberation Air Force and Civil Aviation Administration officer who was invited by the Hainan government to build an airline. But HNA’s humble beginnings belie its current heft—since Jan. 1, HNA has spent $20 billion in acquisitions.

Its single biggest purchase this year was the $10 billion acquisition of CIT Group’s aircraft leasing business by Avolon Holdings, HNA’s aircraft leasing arm. When the deal closes in early 2017, Avolon would become the world’s third biggest aircraft lessor, with 910 aircrafts valued at more than $43 billion, according to Bloomberg estimates.

The CIT deal caps a flurry of transactions for HNA this year, including the $6 billion purchase of U.S. IT and software distributor Ingram Micro, the acquisition of Carlson Hotels (which owns Radisson and Park Plaza hotels) for an undisclosed amount, a minority stake in Virgin Australia airline group, and its most recent purchase of eight golf courses near Seattle for around $137 million which closed last week.

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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.

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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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Beijing and Shanghai may lie almost 1,000 miles apart, but their metro riders share one thing in common. Each morning, commuters hunch over smartphones or tablets to watch the latest Chinese or Korean TV drama or Hollywood movies downloaded from the internet.
Chances are, those videos are downloaded or streamed for free—via legal means or pirated.
But that may be set to change. Internet and media giants are making massive bets in content and technologies, aiming to disrupt China’s longstanding culture of free web entertainment.
Their goal: encourage people to pay for content.
Appetite for Videos
China’s online video market is expected to reach RMB 36.8 billion (US$5.8 billion) in 2015, a 50 percent increase from 2014, according to iResearch, a Chinese internet consultancy. Around RMB 15.2 billion of that figure comes from online video advertising, with the remainder consisting of subscriptions and purchases.
While that’s seems high, online video is still a small portion of the RMB 209 billion (US$32.9 billion) Chinese internet users expect to spend in overall online entertainment, which includes music and games.
This fragmented environment cemented China’s reputation as a market where copyrights go to die.

The gap is apparent when taken into context with how users spend their time online. As of June 2015, Chinese Internet users spent 33 percent of their time on the web on online videos. That’s by far the biggest chunk of time spent on online entertainment activities—social networking was 10.6 percent, and online gaming was only 5.9 percent. The remainder was spent on non-entertainment online activities.
In other words, revenues from online videos aren’t commensurate with usage demand. China has more than 650 million internet users, and monetizing the online video market has become an arms race between domestic internet giants.
Wild Wild West
The question is, how to convince millions of Chinese web users to pay for content?
In the United States, Hollywood movies generally follow the same distribution model. Films are shown in cinemas first, followed by DVD, Blu-ray, and streaming/on-demand platforms. Netflix, Amazon.com, and Hulu are the major players in online paid streaming video.
Media and entertainment giants view China as the new frontier. And in many ways, it’s still akin to the “Wild Wild West.”
No specific distribution channel is customary for domestic Chinese movie releases. Studios may choose to debut films and TV shows on any number of distribution channels including online and mobile. Legal streaming services are numerous and fragmented, coexisting with a number of sites streaming low-quality pirated content.
This fragmented, free-for-all environment encouraged the rampant piracy that has plagued Chinese entertainment industry in recent decades, and cemented China’s reputation as a market where copyrights go to die.
Arms Race
There are new sheriffs in town. The impending culture shift is led by the “BAT,” China’s big three internet giants of Baidu, Alibaba, and Tencent.
Their strategy is to create online platforms with libraries of high-quality and desirable content in high definition, able to be streamed or downloaded on-the-go. With a compelling product, they—and Hollywood studios—hope some users would move from illegal sites to these paid platforms. The services will be promoted alongside the internet giants’ existing products—think Taobao, WeChat, and QQ—which already dominate the social lives of Chinese internet users.
“The generation of users born post 1990 understands the value of content. They are cash-rich, but time-poor. They are willing to pay for the convenience of accessing quality without having to go through the complications of finding illegal content,” Yang Xianghua, senior VP of iQIYI, said in an interview with Variety magazine.
Alibaba, which runs e-retailer Taobao and its namesake internet wholesaler website, is spending billions in this effort. On Nov. 6, Alibaba agreed to pay around US$4.4 billion to purchase the remaining stake of Youku Tudou it doesn’t already own. Youku—a Chinese cross between YouTube and Hulu—hosts a number of well-known video bloggers, has a huge user base, and can drive traffic to Alibaba’s more lucrative online video ventures.
One service standing to benefit is Tmall Box Office, a streaming service launched by Alibaba earlier this year. Similar to Netflix, it requires monthly or annual subscriptions and offers a mix of Chinese and foreign movies and TV shows. Payments (around US$6 for the monthly plan) can be conveniently made via—you guessed it—Alipay, the company’s online payment service.
Taking a page out of Netflix’s playbook, Alibaba is also turning itself into a movie studio. Hong Kong-based Alibaba Pictures was launched in March 2015 to produce Chinese-language TV shows and movies. It also invests in large-scale Hollywood productions—in June Alibaba signed a deal to invest an undisclosed amount in the next “Mission: Impossible” film. Last year the company obtained rights from Lionsgate to broadcast and stream movies such as “The Twilight Saga” and TV shows such as “Mad Men” and “Weeds” in China.
Baidu, China’s No. 1 search engine, also built its online video platform iQIYI into a major player in content streaming. Last month, iQIYI signed an agreement with Comcast Corp. to become the exclusive online distributor of Universal Studios’ new and existing films in China.
comc, which owns China’s biggest social media platforms QQ and WeChat, reached an agreement last week to become the exclusive online distributor of Paramount Pictures’ future releases including “Star Trek Beyond,” set to debut in 2016. The company also acquired online distribution rights to Metro-Goldwyn-Mayer’s James Bond franchise, including the newly released “Spectre.”
It already has a war chest of popular western films. Tencent owns online distribution rights to Walt Disney’s “Star Wars” franchise, Time Warner’s HBO properties, and recently acquired an equity stake in the upcoming movie adaptation of video game “Warcraft.”
For Hollywood studios, China has long been a flawed market. Studios frequently face off against Beijing’s censorship police, which demands content alterations before release. Even after films are approved, box-office receipts are the only material form of revenues for studios. DVD and Blu-ray sales are virtually nonexistent due to rampant piracy.
To make up for this gap, U.S. studios see digital distribution as a potential new revenue stream in China. Timing will largely follow the U.S. distribution model. For example, MGM’s latest Bond film “Spectre” will be

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A worker walks the giant hulk of a ship being built at a state-owned company dock in Chongqing on Feb. 12, 2009. (China Photos/Getty Images)A worker walks the giant hulk of a ship being built at a state-owned company dock in Chongqing on Feb. 12, 2009. (China Photos/Getty Images)

Should China’s state-owned enterprises (SOEs) be privatized, have mixed ownership, or remain state-owned? These are some of the questions that have been tossed back and forth for several years. An ambivalent document titled “Guidance on Deepening the Reform of State-Owned Enterprises” has finally been issued by the Central Committee of the Chinese Communist Party and the State Council.

Some analysts of the document say the objective of the SOE reform proposal is to expand and strengthen SOEs. Others say the government wants to promote SOE privatization based on a free market economy.

The reason for the differing interpretations can be found in the conflicting statements contained in the reform plan.

Mixed Ownership

The introduction of the SOE reform plan highlights “mixed ownership” as the main objective, saying: “Actively introduce other state-owned capital or non-state-owned capital to achieve diversified equity. State-owned capital can maintain absolute control, relative control, or participation in equity, and can help promote enterprises compete in the market.”

However, Article II of the proposal goes on to say, “Public ownership is still the dominant position. It represents the basic economic system and is the focus of the strengthening and development. The nonpublic economy holds a subordinate position.”

It follows that “mixed ownership” means that private enterprises can buy shares in SOEs and become shareholders. However, the bulk of SOE equity consists of state-owned capital. Private enterprises are only in a subordinate position; they do not have decision-making power.

In order to avoid misunderstandings, after the reform plan was published, state-run Xinhua News Agency published an article titled, “We Must Unequivocally Oppose Privatization.”

Market Orientation

The second most important point in the reform plan is to train SOEs in “market-oriented operation mechanisms” and “strengthen the Party’s leadership.”

The document mentions market-orientation 14 times, giving the impression that it is the main theme.

However, article XXIV states:

“The Party fully plays the role of the political core of the SOE. … Clarify the legal status of the Party in the corporate leadership structure of the SOE.”

“The Party governs everything” was the political and economic orientation under Mao. General Secretary Zhao Ziyang made painstaking efforts to separate politics and business and to end the party’s control of enterprises. But all these efforts were swept away after the 1989 Tiananmen incident.

Reforming Private Business

The third point in the reform plan states that private enterprises with “great development and growth potential” will also be main targets of reform.

Article XVIII of the proposal states: “Encourage state-owned capital to invest in private enterprises in various ways … through the market-oriented approach, making equity investments in private enterprises with great development and growth potential in key areas, such as public services, high-tech, environmental protection, and strategic industries.”

In other words, if you are a private enterprise with a poor outlook, rest assured, the SOEs will not patronize you. But if you are a business with good profits and market prospects, the SOEs will show up at your door without an invitation. They will want to acquire part of your business, and you cannot prevent it.

Strengthening SOEs

What kind of enterprises a government supports reflects the focus of its interests. In democratic countries employment is generally the primary consideration.

According to official data, China’s private sector employment opportunities have long surpassed those of SOEs. Now, with the withdrawal of foreign capital, the government should encourage the development of the private sector and make the employment rate a major consideration.

Why, then, do Chinese authorities want to expand and strengthen SOEs, which provide less employment?

For one, along with the economic downturn, the Chinese government is facing great financial difficulties. According to 2012 official data, the private sector accounted for only 13 percent of tax revenue, while SOEs accounted for 70.3 percent. With existing tax sources depleting, and SOEs being a pillar of public finance, this is enough reason for the state to support them.

Secondly, the reform plan states that the ultimate overall goal is to go to market. SOEs currently have very high debt ratios. The source of debt is mainly state-owned banks. This relationship determines if SOEs are not doing well, state-owned banks will collapse. In the past 20 years, the main approach for SOEs to turn around has been to have them listed on the market to attract funding.

But this approached turned out to be ineffective this year. So the reform plan had another tactic: let SOEs and private enterprises have mixed ownership and “promote going to market overall.”

Concern Over Mixed Ownership

Do private businesses want mixed ownership with SOEs? Chinese society has been familiar with the concept of mixed ownership since 2014. But private enterprises have no enthusiasm for it.

Wanda Group Chairman, Wang Jianlin, once told Sina: “In a mixed ownership, private enterprise must control the shares, or at least have relative control. … If SOEs are in control, does it mean I provide money to help the SOEs? What’s wrong with me? I cannot do this.”

It is very obvious that private enterprises do not want mixed ownership. But the government is determined to mix ownership.

To calm private business owners and assure them that the government won’t swallow them up, article XVI of the reform plan states: “The reform must be based on laws and regulations, strict procedures, and be open and fair so as to protect the rights and benefits of every investor in the mixed ownership and to prevent loss of state assets.”

The problem is that the Chinese regime has always used the law as a tool to restrict people. Private entrepreneurs all understand the meaning of “keeping public ownership in the dominant position” and “preventing loss of state assets.”

We shall see if any successful private enterprises can avoid being swallowed up by their state-owned counterparts.

He Qinglian is a prominent Chinese author and economist. Currently based in the United States, she authored “China’s Pitfalls,” which concerns corruption in China’s economic reform of the 1990s, and “The Fog of Censorship: Media Control in China,” which addresses the manipulation and restriction of the press. She regularly writes on contemporary Chinese social and economic issues.

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