When Hainan Airlines wanted to expand in the 1990s, its top executives turned to a little-known businessman in his early 30s, who helped the Chinese upstart develop golf courses, resorts and seaside villas.
It was the beginning of a lucrative partnership for the businessman, Wang Wei, one that would put him on the path to becoming a billionaire. Over the next two decades, Mr. Wang set up companies that managed properties, as well as supplied computers, software services, seafood and Cuban cigars to Hainan Airlines and its parent company, the HNA Group.
What HNA rarely publicly revealed, if ever, is that Mr. Wang is the younger brother of its co-founder and co-chairman, Wang Jian. In the past 25 years, HNA has regularly funneled business to a small group of relatives and associates of the company’s senior executives, dealings with limited disclosure to investors in its listed companies or its overseas bonds, according to a review of thousands of corporate records by The New York Times.
From its roots as a small airline, HNA has evolved into one of the few Chinese conglomerates with a worldwide reach. The company, which produces $100 billion in annual revenue, has made multibillion-dollar deals in the United States, Europe and the rest of Asia, amassing big stakes in multinationals like Deutsche Bank and Hilton Hotels.
HNA is part of a new breed of aggressive Chinese deal makers that have risen, seemingly out of nowhere, into the ranks of the global corporate elite. But the ambitions of these giants have been fueled by debt and masked by opaque ownership structures, creating uncertainty over their corporate governance, strategic motivations and financial health.
The situation makes it hard for governments and businesses around the world to understand the forces behind the spending sprees. Companies and regulators could be making decisions without a complete picture of how the conglomerates work, while investors may not know what they are buying.
HNA and other big Chinese players like Anbang Insurance Group and Dalian Wanda Group are under pressure at home and abroad, as the authorities and investors worry about the risk these highly indebted companies pose to the broader economy.
Untangling the operations of HNA, already complicated by its murky ownership and a complex array of affiliates, is made more difficult by a web of interconnected deals with friends and family members of top executives. The documents reviewed by The Times ” which include annual reports, court filings and corporate registration records in the United States and China ” reveal a systematic pattern of these so-called related-party transactions with friends and family.
Wang Wei is tied to more than a dozen companies that do business with HNA. Other relatives and associates of the company’s top executives have scores of ventures that work with HNA.
“HNA Group and its portfolio companies work closely with global, independent accounting, financial and legal advisors to comply with regulatory disclosure requirements in relevant jurisdictions, including disclosures with respect to related party transactions,” the conglomerate said in a statement. “Related party transactions are conducted, reviewed and documented on commercial terms consistent with appropriate standards.”
The lack of transparency among HNA and other conglomerates could amplify concerns in the United States and elsewhere. HNA’s ownership of nearly 10 percent of Deutsche Bank, Germany’s largest bank, has recently drawn scrutiny from European regulators.
The European Central Bank, which supervises commercial banks in the eurozone, is considering opening an inquiry into whether HNA meets the criteria for large bank shareholders, according to two people with knowledge of discussions who were not authorized to speak on the record. If regulators were to determine that HNA is not qualified – for example, because it is poorly financed – the company could be forced to sell its stake or be stripped of its voting rights.
In Beijing, the authorities are increasingly worried about deeply indebted companies like HNA that have borrowed huge sums from state banks. The debt addiction is threatening China’s economy as concerns swirl that some of the biggest conglomerates represent a hidden risk to the country’s financial system. Chinese officials have begun to clamp down on prolific deal makers like Anbang, whose chairman was recently detained by the police for undisclosed reasons.
Regulators around the world closely watch transactions with family and friends to ensure that companies put the interests of investors first. The deals can present potential conflicts if contracts are awarded without a competitive bidding process or if associates profit at the expense of the company and its shareholders.
Should HNA have failed to properly report such transactions to banks or investors, it could run afoul of regulators in multiple locales, including China, Europe and the United States. Any regulatory scrutiny over HNA’s business dealings could hamper the conglomerate’s ability to raise new money.
“There are red flags around this type of thing,” said Geoff Peck, a risk management expert at FTI Consulting, a global advisory firm. “I think regulators would take a dim view if it wasn’t disclosed.”
HNA’s spectacular growth has catapulted it to the forefront of China’s “go global” campaign to develop big multinational brands. It promotes itself as a modern enterprise – transparent, socially responsible and run by executives trained at Harvard.
The company has hired a fleet of elite lawyers, bankers and auditors, including JPMorgan Chase, UBS and PwC, that have scoured its books and advised the company on major deals. The company recently passed a United States government review to win approval for its $6 billion acquisition of the California technology company Ingram Micro, a process that requires transparency about corporate ownership, financing and affiliates.
JPMorgan, UBS and PwC declined to comment. A spokesman for the United States Treasury Department, which led the review, said the agency does not comment on the process.
HNA’s dealings with family and friends trace back to the company’s founding as Hainan Airlines in 1993.
At the time, China was in the midst of an economic overhaul, seeking to transition from a planned economy to one where market forces and private entrepreneurship were encouraged. After Hainan island was designated a special economic zone, local leaders tapped Chen Feng, a government official who had worked with the World Bank, and Wang Jian, who worked at the country’s civil aviation authority, to help start a regional airline.
The two men persuaded the local government to establish Hainan Airlines as a joint stock company. A new phenomenon in China, the structure allowed private investors, including the founders and top executives, to own a piece of the state-backed airline. They also persuaded the government to let foreign investors, for the first time, take stakes in a Chinese airline. During a trip to Wall Street, Mr. Chen pitched the carrier to the billionaire George Soros and won a $25 million commitment, a huge credibility boost.
“Within China, it was the only airline allowed to operate like that,” said Feng Chongyi, a professor at the University of Technology in Sydney. “Chen Feng was able to get huge loans from the state banks. So people know there was something special about his deals.”
As the company took off, family and friends of the company’s senior executives began setting up private businesses, positioning themselves to profit from the airline, according to The Times’s review of documents.
A woman named Huang Weirong owned a stake in Beijing Business Culture Diffusion Company, which has handled tens of millions of dollars in advertising for Hainan Airlines. A man named Zhang Zhijun controlled Xiangjian Information Technology, which invested alongside HNA and its affiliates in technology and airline information systems.
Both individuals had separate ties to HNA executives. The two had each created numerous other companies with the family of Wang Jian, the co-founder and co-chairman.
Mr. Wang’s younger brother, Wang Wei, was one of the biggest beneficiaries of HNA’s business.
His companies sold equipment and services to Hainan Airlines and helped develop the company’s properties, including West Coast Golf Club in Haikou. He was also a key partner in a large oceanfront property on Hainan island, which today houses high-end villas and a luxurious resort.
In the mid-1990s, O’Brien McGarey, president of the Dye Design Group, a prominent golf course design firm in Colorado, said he was hired by Hainan Airlines to assess a large plot near Haikou, with plans to build a golf course and villas. “We signed a contract with Hainan Airlines and we met with Wang Jian and Wang Wei, his younger brother,” Mr. McGarey said. “Wang Wei was titular head and he was running the golf course.”
It is unclear how Wang Wei raised the initial money for his businesses. But along the way, he landed on the list of China’s billionaires.
The family of Mr. Chen, HNA’s co-founder and co-chairman, also forged business alliances with the company.
When Hainan Airlines first sought to establish a presence in the United States in the 1990s, Mr. Chen’s younger brother, Chen Guoqing, set up Pacific American Corporation in New York. The company purchased aircraft engines and spare parts for the airline’s fleet, which included Airbus 320s, Boeing 737s and Gulfstream jets. Pacific American also helped HNA buy a collection of European hotels and co-invested with HNA in Yangtze River International Leasing Company.
Pacific American’s ownership is fuzzy.
For years, it has billed itself as a subsidiary of Hainan Airlines or the HNA Group. Chen Guoqing called it a subsidiary in his biography for Asia Society, a nonprofit in New York. Court documents, filed in the United States as part of a 2007 bankruptcy dispute involving Dornier Aviation North America, listed Pacific American as an affiliate of Hainan Airlines.
Public filings in Asia do not describe Pacific American the same way. A 2015 bond prospectus, which HNA filed in Singapore, described it as a â€œrelated partyâ€ while annual reports filed by Hainan Airlines over 18 years stated that Pacific American was a major supplier. Those filings did not disclose that Pacific American was run by the younger brother of Chen Feng, and more recently, by Chen Feng’s son, Daniel Chen.
A spokesman for the HNA Group confirmed that Pacific American is an independent company and is not owned by HNA or any of its affiliates.
At least one major investor was in the dark about such deals: Mr. Soros.
Hedge funds controlled by Mr. Soros ultimately invested a total of $50 million in Hainan Airlines and an affiliate, Grand China Airways. Early on, an executive on Mr. Soros’s team usually served as a director of Hainan Airlines.
But the family ties to suppliers and service providers were never discussed, according to three people with knowledge of the investments. Mr. Soros, who declined to comment, sold his stake in 2011.
The close connections also extended to HNA’s acquisition strategy. The company has created hundreds of affiliates, public and private entities that regularly do business with one another – swapping assets, merging and then restructuring.
Over the past seven years, more than 30 acquisitions have involved deals between two companies under the HNA umbrella, deals worth an estimated $20 billion, according to Dealogic. In 2015, Xian Minsheng, an affiliate of HNA, paid $8.6 billion to buy Hainan Supply Sales and Daji, also an affiliate of HNA.
This sort of serial deal making has been a driving force behind the rapid growth of HNA, a strategy backed by ever increasing amounts of debt. HNA has more than $100 billion in debt, much of it owed to state-run banks.
As HNA and other conglomerates make ever bigger bets, Chinese policy makers, economists and investors are wondering if the debt is sustainable. Shares in several HNA public companies have slumped in recent weeks over debt concerns.
HNA’s Mr. Chen has seemed unfazed in the past. “After you’ve accumulated so much lice, you no longer feel the itching,” he said in an interview some years ago. “When you borrow a lot of money, you have no problem sleeping.”