CHEN FENG was in fine spirits as his Parisian guests, midway through a banquet of lobster and candied duck, toasted his success. The chairman of HNA, a Chinese conglomerate that began as a small airline just over two decades ago, was in France for the firm’s “international week”, featuring glitzy events ranging from a golf tournament to a fashion show. The gala on June 26th coincided with Mr Chen’s turning 64. Wearing a Chinese suit, he stood on stage at the Petit Palais (pictured), as enormous sparklers blazed on a display beside him. The revellers, aided by opera singers, offered a chorus of “Happy Birthday”.
In normal times the evening would have been notable for what it revealed about a new kind of ambitious Chinese company, eager to make a global name for itself. But the circumstances were abnormal. A few days earlier word had leaked that China’s regulators wanted banks to check their loans to HNA and three other fast-growing companies. This had caused panic among holders of the firms’ shares and bonds. Analysts wondered whether the companies’ global shopping spree would screech to a halt. The good cheer displayed by Mr Chen and his colleagues seemed designed to reassure people that in HNA’s case, it would not.
The three other big companies named by the banking regulator were Dalian Wanda, a property developer that is building an entertainment business; Fosun, a health-to-tourism conglomerate; and Anbang, an insurer that has made a series of high-profile overseas deals. The regulator also mentioned a lesser-known entity, Zhejiang Rossoneri, an investment company that bought AC Milan, a football club.
The regulator’s instructions were simply that the banks take a closer look at loans to these companies to guard against risks. But analysts looked for possible hidden meaning. The regulator often asks banks about their exposures to various industries, but it was unusual for it to specify firms by name. Rumours spread that banks were responding by halting loans to the companies and even selling their bonds. The firms denied this was happening, which may have helped the prices of their shares and bonds to recover somewhat.
Several of the companies have connections to the ruling elite. This has led some observers to speculate that the regulator’s order might be related to factional struggles, or that it might signal an attempt by China’s president, Xi Jinping, to tighten his grip on the economy by toppling tycoons. But trying to take down so many business leaders at the same time would be an assault of unprecedented magnitude, even by Mr Xi’s standards.
There is a better explanation, namely that the action is part of a broader campaign over the past six months to clean up the financial system: a “regulatory storm”, as many have described it. Officials have worked to close loopholes, to stamp out insider trading and to cut reckless borrowing. They have targeted predatory investors, describing them as “financial crocodiles”.
How do HNA, Wanda, Fosun and Anbang fit in? They have been China’s most aggressive investors abroad. Of the $230bn of overseas deals pursued by Chinese companies since the start of 2016, these four groups account for more than $60bn, according to S&P Capital IQ, a data provider. This poses two risks. First, the cash exodus has piled pressure on the yuan and forced the central bank to eat into its foreignexchange reserves to support the Chinese currency. Second, much of the investment has been funded by domestic borrowing. If the overseas assets perform poorly, the companies could be left with crippling debts at home.
