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China's Property Restriction Hit Investors.

Chinese New Order for curbing property ballooning overseas has affect foreign investors


GLOBAL REPORT—Chinese companies are having their overseas spending severely squeezed by central government restriction order, as according to well placed sources in the communistic state, this is due to government concern over levels of increasing debt and overseas' property ballooning syndrome.

In January, China’s Ministry of Commerce stated that Chinese investors have made about 1.13 trillion Chinese yuan ($171.4 billion) of direct non-financial investment since 2016, which is “up 44.1% year on year in 7,961 enterprises overseas over 164 countries and regions.” Believing most of this capital is bank-secured debt, China’s State Administration of Foreign Exchange passed new measures banning state-owned banks from providing further debt to Chinese firms and tightened the ability of companies to scoop overseas interests it believes are outside those firms’ core industries and services. Chinese firms and subsidiaries with considerable hotel industry interests include Anbang Insurance Group, Dalian Wanda Group, HNA Tourism Group and Shanghai Jin Jiang International Hotels. The first three of those companies have felt pressure by the Chinese government in recent months.

Other companies, deals and loans are under observation by the Chinese government, according to Henry Chin, head of research for the Asia/Pacific at business advisory CBRE. The effects have been quick to develop, with outbound mergers-and-acquisitions activity reduced by almost half in the first six months of 2017. Chin said China plans to stabilize its national currency by restrict capital flight and reduce debt and associated risk have already shown success, with “overseas direct investment in the property sector (having fallen) 82% year-on-year in H1 2017.”

Jesper Palmqvist, area director for the Asia/Pacific at STR, the parent company of Hotel News Now, said the announcements in recent months regarding large sums of Chinese corporate money going overseas have dwindled but that he did not expect the boom years to end in terms of all global investment, Chinese or otherwise.

“It’s easy to say that a lot (of overseas investment) was opportunistic and less strategic, but I don’t think that’s the case overall,” Palmqvist said, who added that if Chinese overseas capital eased up, there would be plenty of other money ready to step in.

Under the microscope: In June, Wu Xiaohui, Anbang’s chairman, was arrested by Chinese authorities on alleged charges of corruption, and Anbang confirmed in a news release that Wu had stepped down because he was “temporarily unable to fulfill his role for personal reasons.” As of 24 August, Xiaohui remains in detention, according to the South China Morning Post.

Months earlier, Anbang stated in April it had “sufficient cash flow,” which if true would not stop the company seeking further overseas assets. Since then, reports suggest Anbang has been told to sell its hotel assets, including the Waldorf Astoria New York and Strategic Hotels & Resorts. In July, Reuters reported HNA Group’s two charitable organizations—Hainan Province Cihang Foundation and New York-based Hainan Cihang Charity Foundation—combined own more than 52% of the company. HNA is still in negotiations to buy the remaining 49% of Carlson Rezidor Group, which European Union law requires it to do so if it does not sell off a portion of its existing 51% share.

Media reports have indicated that HNA does not have the capital available to purchase the outstanding shares. In late August, Dalian Wanda released a news release denying its chairman Wang Jianlin has been told he is not allowed to leave China, news that saw an immediate, temporary fall in the firm’s share price.

Not all cores are rotten Henry Tillman, chairman and CEO of Grisons Peak Investment Bank, which tracks Chinese outbound investment, said while the two largest transactions in the last quarter of 2016 across all industries were both “slightly over $2.2 billion—one in U.S. real estate and one in basic materials—there were only five transactions/investments over $1 billion announced during Q1 (2017). The data … clearly indicates that the most recent outbound activity is very much following the past few months’ guidance from the central government.” Tillman said this decline in investment is consistent with the Chinese government’s policy encouraging overseas direct investment associated with its “Belt and Road Initiative” of infrastructure development from China to Europe, and also to “resolve the issue of overcapacity in global markets, as well as supervising and preventing irrational investments.”

Palmqvist agreed the business model options still open to Chinese capital means recent regulations would not spell the end of Chinese investment.

“Restricted property investments overseas could be a gray zone, especially if certain projects can be profiled as ‘Belt and Road’ at least in part,” Palmqvist said. “One would expect that to not remain an issue then for either of Jin Jiang, HNA, et cetera. Wanda (is) perhaps different, given that whole play a month ago with Sunac.”

Palmqvist said the 76-hotel deal struck by Dalian Wanda with Chinese property developer Sunac China Holdings might merely be the Chinese government “shuffling money between two companies.” Corrine Song, senior associate analyst at market research provider Euromonitor International, said the Dalian Wanda deal, despite being an intra-China transaction, still was part of the overall process of reducing debt levels. That said, this deal, too, is under scrutiny by Chinese regulators, Reuters reports.

Luxury discouraged Sources said Chinese capital has cooled off on targeting high-end hotel properties.

“We do not see a lot of support for 6-star hotels,” Tillman said.

Song agreed, noting that the transactions pace has slowed for the segment.

“Luxury hotels have been expanding at a high speed over the past 10 years with a large number of newly opened outlets resulting in oversupply of rooms, which leads to a declining trend on value sales due to the high costs of operations,” she said.

Song added high-end properties are a definite pain point for Chinese firms.

“We are talking about luxury hotels, which saw decline in terms of value sales in 2017 due to the large expansion reflected on the increasing number of outlets,” Song said. Chinese investments in such areas as other forms of real estate and gaming also have been discouraged.

“HNA made five investments in March alone, representing 24% of overall Chinese announced outbound investment in March,” Tillman said. “Conversely, Anbang was very quiet in (the first quarter), announcing only the acquisition of a building in South Korea. We saw no new activity from Jin Jiang.” Chin said the discrepancies between actual investment turnover and official data indicates that significant Chinese capital already is outside of China. “While property’s inclusion on the list of restricted sectors mean any proposed overseas acquisitions by Chinese companies will be subject to additional layers of scrutiny, the impact will be far more nuanced,” he said. Chin speculated Chinese companies might look into various ways of circumventing new regulations, including employing offshore financial institutions, investing through Hong Kong, a special administrative region of China, and adopting new business models such as limited partnerships and joint ventures and targeting smaller equity stakes of below $50 million. Palmqvist said the stricter laws might bring new investors into the mix.“I would absolutely think that we’d see new players from China going abroad,” he said.

Several of the Chinese hotel firms mentioned above were contacted for comment but did not respond as of press time.


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