Beijing’s Shadow Banking Campaign Capsizes Ambitious Overseas Deals

Beijing’s heavy-handed crackdown on the shadow banking sector has spelt disaster for  Chinese companies that overextended themselves on foreign investments when cash was ample.

South China Morning Post reports that concerted efforts by regulators to stymie shadow banking have left many Chinese companies starved of much needed funds in the midst of foreign acquisitions.

One Beijing-based manufacturing and health conglomerate decided to acquire a stake in a mid-tier Hollywood film studio at the start of 2017, when funds were easily obtained.

According to executive James He the company borrowed funds in China to pay USD$30 million as a deposit for the acquisition, during a period when other cash-flush Chinese companies such as Anbang Insurance, Dalian Wanda and HNA Group indulged in high-profile buying sprees of real estate, entertainment assets and fitness centres.

Leery of the risk involved in the offshore purchases of these Chinese companies, Beijing launched a crackdown on foreign investment 2016 and 2017, ramping up capital controls as well as ordering banks to refrain from providing credit for deals that regulators referred to as “irrational.”

As a consequence, He’s company was unable to make payment as scheduled last June, with the studio’s owner now only willing to return the deposit if the company can find an alternative buyer.

Amidst Beijing’s shadow banking campaign as well as the introduction of a ban on foreign investment in certain sectors such as entertainment, however, He told the SCMP that “it’s almost impossible to find buyer who has the money ready offshore.”

The company’s woes are further compounded by the use of its own equity as collateral to borrow millions of yuan, and the recent US-led downturn in share prices.

While an initial batch of 600 million yuan in debt is already due, the company’s share price has plunged by over 40% from its peak in late 2016.

“The cash chain is literally broken and we might lose everything,” said He to SCMP. 

“We were aggressive in our investment, but the business we acquired in China in the last few years did not generate ideal cash flow, while our stock backed debts met margin calls as the market tumbled.”

Banks are also unwilling to provide bridge loans due to heightened risk controls and regulatory tightening.

James He is far from the only Chinese investor to see an overseas entertainment-sector deal turn sour against the backdrop of Beijing’s shadow banking crackdown and tumbling share prices.

SCMP also points to the case of a Chinese property firm which wants to sell off its equity stake in a major American company at a 60% discount to the price of USD$430 million that it paid last year.

According to Hong Kong-based investment banker Michael Li the property developer, which controls three listed companies, has missed loans and interest payments worth 213.5 million yuan, prompting a court in the Hunan capital of Wuhan to put a freeze on its holdings in an A-share company.

“They are desperate for cash,” said Li. “But few people have cash now and potential buyer from the mainland will also need to borrower to take over the take, which is not easy for now.”

 

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