Beijing: China has kicked up its campaign to tame its free-spending, debt-laden companies, as authorities punished the corporate chiefs of two troubled companies while letting a troubled property giant continue to struggle under the weight of more than $300 billion in debt.
Authorities in China have taken into custody the top two executives of HNA Group, a transportation and logistics conglomerate that bought up businesses around the world before quickly collapsing under heavy debts. The company said late Friday that police in Hainan province, where it is based, had seized its chairman, Chen Feng, and chief executive, Tan Xiangdong.
Both men were detained “in accordance with the law for suspected crimes,” the company said in a statement, without specifying those offenses. HNA did not immediately respond to requests for comment.
Tan appears to be a US citizen, according to personal information about him that the company provided in a filing to Hong Kong regulators in 2019. A U.S. passport number was included.
The announcement came on the same day that the state-run Xinhua News Agency said Yuan Renguo, the former chairman of Kweichow Moutai Group, which produces a high-end Chinese liquor often consumed by the business class, was sentenced to life in prison for accepting more than $17 million in bribes.
Those punishments are taking place against a broader backdrop of pressure on corporate practices that the Chinese Communist Party increasingly regards as dangerous to the economy and its own grip on power. They occurred as global investors await the fate of another troubled Chinese corporate giant, China Evergrande Group.
Evergrande, which is struggling under more than $300 billion in debt, is widely seen as at risk of defaulting on its obligations. It is not clear yet whether it made a payment on $83 million in foreign debt that was due Thursday, prompting another sharp fall in its share price Friday.
Severe troubles at HNA and Evergrande are taking place against a backdrop of broad measures by Beijing that are leaving the country’s once freewheeling private sector feeling increasingly besieged.
Debt fuelled growth
In recent weeks, the Communist Party has responded to public concerns about rising income inequality by shifting its emphasis in economic policy. A goal of “common prosperity” has begun to supplant a previous tolerance for a private sector that grew rapidly but sometimes borrowed recklessly.
HNA became a symbol of the mercurial rise and profligate spending of China’s first wave of private conglomerates with strong political backing. It acquired large stakes in Hilton Hotels, Deutsche Bank, Virgin Australia and other businesses, and at its height employed 400,000 people around the world.
HNA struck 123 deals in three years, only to begin running into trouble in 2017 in repaying the debt incurred to pay for its acquisitions.
Chen’s co-chairman, Wang Jian, died in 2018 when he fell off a wall while sightseeing during a business trip to France. The death was ruled an accident.
HNA, Evergrande and other large, private Chinese companies that grew quickly only to face financial collapse in the past several years are often referred to in China as gray rhinos. The term refers to obvious dangers that are ignored until they suddenly become very dangerous, and had been taken up by Chinese officials.
The threat posed by Evergrande could be the biggest yet to the country’s traditional business model. It borrowed and spent for years, lifting the company to huge sales even as its debt mounted. Now ratings firms and investors consider it at serious risk of default, unnerving world markets because of its size.
Its shares fell nearly 12% Friday as a Thursday deadline to make its interest payment passed without any word from the company about whether it had met its commitments.
One bondholder, speaking on condition of anonymity to discuss the matter, said Thursday the company had not made the payment. But that lack of payment did not necessarily put the company in default. The company’s debt covenants provide it with a 30-day grace period before the missed payment results in a default, the person said, meaning debt holders could be facing a month in limbo.
Fears of contagion
The concern extends to property owners and policymakers in China who would face the fallout of a possible default. A steady flow of negative news from Evergrande has prompted panic in markets and raised fears of possible economic contagion - including outside China - should the company collapse.
Unable to sell off parts of its corporate sprawl or raise fresh cash through the sale of new properties, Evergrande is also facing angry suppliers, homebuyers and employees, some of whom have protested and demanded their money.
The tension in global financial markets has eased more recently, in part as Chinese officials step in to shore up confidence - including by pumping billions of dollars of capital into the country’s banking system. Several bank executives and central bank officials outside China also said the impact on institutions in the United States and Europe should be minimal.
On another key question for investors, whether China will directly bail Evergrande out, Beijing has remained tight-lipped while emphasizing that no Chinese company is too big to fail.
It helped that Evergrande said Wednesday that it had reached a deal with investors over a different payment due for mainland Chinese bondholders.
Despite the lingering uncertainty, stock investors seem to expect a better outcome from Evergrande debacle than they did earlier in the week. On Wall Street, the S&P 500 closed up more than 1% Thursday, recouping its sharp losses from earlier in the week - in part as executives at two of Evergrande’s debtholders played down the risk.
Ralph Hamers, CEO of UBS, said at an investor conference Thursday that the bank’s direct exposure to Evergrande was “immaterial,” adding that its troubles have “not been keeping me up at night,” according to a transcript from the software firm Sentieo.
Noel Quinn, CEO of HSBC, acknowledged at the same conference that Evergrande’s challenges might seep further into the equity and credit markets.
“I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact,” he said, calling the Evergrande situation “concerning.”
A representative for BlackRock declined to comment.
Central bankers outside China have also played down the risk this week. On Wednesday, Federal Reserve Chair Jerome Powell described Evergrande’s troubles as “particular to China” during a news briefing, and on Thursday, Sam Woods, deputy governor of the Bank of England, told Reuters that the exposure of British banks and insurance companies to Evergrande was “not material.”
