The Politics of Chinese Credit Risk

China's President Xi Jinping claps after his speech as he and other new Politburo Standing Committee members meet with the press at the Great Hall of the People in Beijing, China October 25, 2017. To match Special Report CHINA-RISK/SHADOW BANKING REUTERS/Jason Lee/File Photo

How one Chinese conglomerate's misadventures symbolizes China's new economic attitude.

When Xi Jinping ascended to become the unquestioned leader of the CCP and co-equal with Mao last year, his coronation marked the conclusion of a “anti-corruption” campaign to systematically destroy any potential rivals in the party apparat. Insecurity drives Xi’s relentless focus on abolishing alternative sources of economic and political power: his father, Xi Zhongxun, was persecuted during the Cultural Revolution, and Xi was for many years shunned because he was deemed “not suitable” to be a member of the party.

Now firmly in charge of both the CCP and the Chinese military and police, however, Xi appears intent upon remaking China’s economy in his own image and deemphasizing foreign influence via increased party control over “private” companies. When Xi proposed his “Thought on Socialism with Chinese Characteristics for a New Era”—the opening phrase of his report to the CCP congress last year, he was starting a process of economic and political reform that is ultimately designed to focus power into his hands indefinitely. And this new stage of the “reform” process will be focused on domestic firms such as HNA as well as foreign companies with roots in China.

“The [anti-corruption] campaign was aimed at the public sector; it cleaned out a rotten bureaucracy and helped Xi to wrest power from China’s provincial barons and powerful figures in the military,” writes Qi Gua in The London Review of Books. “It looks as though the next five years will see it extend to the private sector, and the first task will be to bring the tech giants to heel.”

He continues: “The government is now proposing to increase its stake in our big tech monsters, Alibaba, Tencent and Baidu. According to Bloomberg, it already has holdings in Tencent (0.8 per cent) and Alibaba (1.3), but wants to acquire another 1 per cent in each: an approach they’ll find hard to refuse, even though the objective is to penetrate the two companies and oversee every key decision they make. Mao called this steady infiltration ‘mixing the sand into the hardened soil.’”

As Xi prepared to take control of the CCP, China began to tighten capital outflows in the second half of last year. This change in the official tolerance for foreign investments has slowed the hectic pace of dealmaking by domestic companies looking to scoop up overseas assets. The imponderable question for foreign investors, banks and companies with exposure to HNA is whether China’s leadership views the Hainan-based conglomerate as an ally or a threat. The same analysis must be done with respect to other Chinese companies with significant foreign participation.

So long as China’s banks are willing to work with HNA to restructure its debt and sell off assets, then the company is likely to survive. But any such analysis must recognize that, more than ever under Xi Jinping, it is the CCP representative that ultimately validates the decision by the bank’s management.

If Xi Jinping finds the continued existence of HNA to support his political objectives, particularly the renewed focus on investment in China, then it is likely that China’s state-controlled banks will continue to be constructive when it comes to unwinding HNA’s massive pile of debt. If not, then HNA may be pushed into a forced restructuring that will mark a further confirmation that China’s leadership has changed the way in which views foreign investments by corporate “tigers.”

Richard Christopher Whalen is an investment banker and author who lives in New York City. He is Chairman of Whalen Global Advisors LLC and focuses on the financial services, mortgage finance and technology sectors.

Image: China's President Xi Jinping claps after his speech as he and other new Politburo Standing Committee members meet with the press at the Great Hall of the People in Beijing, China October 25, 2017. To match Special Report CHINA-RISK/SHADOW BANKING REUTERS/Jason Lee/File Photo

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