In China, Herd of ‘Gray Rhinos’ Threatens Economy


Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about “gray rhinos” — large and visible problems in the economy that are ignored until they start moving fast.

The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.

Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a “gray rhinoceros,” without naming specific companies.

Chinese regulators have become increasingly concerned that some of the biggest conglomerates have borrowed so much that they could pose risks to the financial system. Banking officials are ramping up scrutiny of companies’ balance sheets.

The turnabout for the first generation of post-Mao Chinese capitalists, once seen as exemplars of the country’s ingenuity and economic prowess, has been swift.

Last year, the chairman of Anbang, a fast-growing insurer that paid $2 billion for the Waldorf Astoria in New York, held court at the luxurious hotel, wining and dining American business leaders. Last month, the chairman, Wu Xiaohui, was detained by the Chinese police, for undisclosed reasons.

Borrowed Fortunes

Deal making in China has skyrocketed in the last few years, as Chinese companies look beyond their borders. The spending spree has been funded by debt, prompting regulators to scrutinize aggressive acquisitors.


Fosun, run by a professed “Warren Buffett of China,” made multibillion-dollar deals for Club Med, Cirque du Soleil and other brands. The company was recently forced to deny speculation that its chairman, Guo Guangchang, who was briefly held by officials in 2015 for unknown reasons, was in custody again.

Founded as a regional airline, HNA evolved into a powerhouse, with stakes in Hilton Hotels, Deutsche Bank and the airport ground services company Swissport. European regulators are scrutinizing the conglomerate, while one big Wall Street bank, Bank of America, has decided not to do business with HNA.

Dalian Wanda went head-to-head with American entertainment giants, promising a year ago to defeat Disney in China. Now, the Chinese company is in retreat, selling off its theme parks and hotels.

“The downside of these new companies is that there was no one with the political or regulatory strength who could control these companies,” said Brock Silvers, the chief executive of Kaiyuan Capital, a boutique investment banking advisory service in Shanghai.

The gray rhinos have a common characteristic: a lot of debt and many deals.

For years, China’s banks readily doled out loans, eager to keep pumping money into the economy. They doubled down after the global financial crisis in 2008, to prop up growth and push down the value of the currency.

The conglomerates, with their stellar reputations and strong profits, were at the front of the lending line. HNA has secured a $90 billion credit line from state-controlled banks. Anbang spent more than $10 billion in three years, deals that were financed mostly by selling so-called wealth management products — opaque investments promising high rates and low risk.

President Xi Jinping during a news conference in Berlin this month. He recently warned that financial stability is crucial to China’s national security. CreditFabrizio Bensch/Reuters

With state money in hand, companies looked beyond their borders, at the urging of the government. Over the past five years, Wanda, Anbang, HNA Group and Fosun have made at least $41 billion of overseas acquisitions, according to Dealogic, a research firm.

The country’s debt levels soared. In 2011, total credit extended to private, nonfinancial companies was about 120 percent of economic output in China. It is now 166 percent.

“The Chinese government played the role of an indispensable enabler,” said Minxin Pei, a professor at Claremont McKenna College in California who studies Chinese politics. “If you look at how they got so big, it’s all through taking on debt.”

By 2015, China’s economy was losing steam. And the government, which had been looking for ways to reinvest all the dollars pouring into the country, suddenly needed to prevent all the money from flowing out. Beijing had to dip deep into its pockets to keep the currency from sinking.

The government started taking a closer look at the most prolific deal makers. In December, four big Chinese regulators, in a rare joint statement, warned about “irrational” investments in overseas real estate, entertainment and sports, calling the areas rife with “risks and hidden dangers.”

Some of the conglomerates’ purchases appeared to fit that description.

Wanda paid a hefty $3.5 billion last year for Legendary Entertainment. The studio had produced blockbusters like “300” and “Godzilla” only to follow with flops like “Warcraft” and “The Great Wall.”

HNA Group, the parent company of Hainan Airlines, began as a regional airline and grew into a global powerhouse. CreditAgence France-Presse — Getty Images

Fosun bought Britain’s Wolverhampton Wanderers Football Club. It was among a number of Chinese deals for soccer teams, including AC Milan, Inter Milan and FC Sochaux.

Anbang was in a protracted battle for the Starwood hotel chain, bidding up the price and drawing scrutiny. It eventually walked away from Starwood, which Marriott purchased for $13 billion.

In recent months, the political and regulatory environment has quickly shifted. Chinese officials have also become preoccupied with preventing any disruption to the Communist Party’s next congress, where the leadership is selected every five years. In the lead-up to the event this fall, the government is putting a premium on stability.

The climate has put a chill on big deal makers. Fosun has nearly stopped its frenetic deal making. HNA’s purchases have also slowed.

Both companies said their finances remain in good shape. “We maintain strict control over our financial risk and continue to improve our debt and cash flow,” Fosun said in a statement.

HNA said that its ratio of debt to assets had declined over the last seven years. “HNA Group is a financially strong company with a robust, diversified balance sheet that reflects our continued growth and engagement across the capital markets,” the company said. On its relationship with Bank of America Merrill Lynch, the conglomerate said, “With the exception of some modest asset-backed financing provided to some of our leasing subsidiaries, where business continues as usual, HNA Group has never engaged B.A.M.L. for any significant business.”

Nanchang Wanda Park theme park in Jiangxi Province. After promising to defeat Disney in China, the Chinese company is selling off its theme parks and hotels. CreditMark Schiefelbein/Associated Press

Wanda announced this month that it would sell $9.3 billion worth of hotels and theme parks to Sunac China, another real estate developer. But then Wanda was forced to scrap the original deal and split the portfolio between Sunac and another Chinese buyer, R & F Properties.

“Everyone is concerned about Wanda Commercial’s debt problems,” Wang Jianlin, the chairman of Dalian Wanda Group, said about the group’s main real estate subsidiary at a news conference on Wednesday.

In early May, Chinese insurance regulators, worried about Anbang’s precipitous growth, halted sales of two investment products. Since then, Anbang’s lifeblood — the sale of wealth management products — has slowed to a trickle.

Anbang said that operations were normal and that it had ample cash. The company’s longtime chairman, who has been on leave since his detention, has not been publicly charged with any crimes.

The Chinese giants now look more like gray rhinos. The term itself comes not from biology but from an eponymous business book that has become somewhat popular this year in China.

People’s Daily, the main newspaper of the Chinese Communist Party, used the term last week in a strong warning after President Xi expressed concern about debt. “Risks in the financial sector are sophisticated,” said the unsigned commentary. “Therefore, precautionary measures should be taken to prevent not only ‘black swan’ but also ‘gray rhino’ events.”

The concern facing these conglomerates is whether they can manage their high-priced expansions well enough to earn the profits needed even to repay loans issued at low rates. If regulators or banks take more decisive actions to rein in credit, the rhinos could become endangered.

“When that stops, there will be a reaction,” Mr. Silvers said. “Whether that will be a crash or something modulated over time is hard to see.”


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