Beijing Is Investigating Some of China's Top Overseas Deal Makers -- Update

By Lingling Wei and Wayne Ma in Beijing and James T. Areddy in Shanghai Features Dow Jones Newswires

China's banking regulator is conducting a sweeping check on the borrowings of some of the country's top overseas deal makers, according to people with knowledge of the matter, in one of the most forceful attempts yet to get a grip on runaway debt.

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The list covers some of the highest-flying private conglomerates in China, known for flamboyant owners, political connections and acquisitive appetites. One is Anbang Insurance Group Co., whose chairman Wu Xiaohui has been detained by investigators of economic crimes, according to people familiar with the matter. Also on the list is HNA Group Co., one of China's most aggressive overseas investors; Fosun International Ltd., whose chairman dubs himself as China's Warren Buffett, and Dalian Wanda Group, a property giant that recently has branched out into entertainment.

The fifth company on the list is Rossoneri Sports Investment Management Changxing Ltd., which made headlines with its acquisition this year of Italian soccer powerhouse AC Milan.

The five are famed for bold international bets on big brand names, opaque structures and a dizzying amount of deal-making. They accounted for a whopping $387 billion in overseas investment since the beginning of 2015 -- 16% of Chinese companies' total, according to Dealogic.

"They're all guys that have engaged in high-profile marquee international acquisitions," from soccer clubs to Hollywood businesses, said Bill Bowler, an equity-sales trader at Forsyth Barr Asia in Hong Kong. The regulator's move has already sent shock waves through Chinese markets and could rock the deals world, where the groups are well known.

Fosun and Anbang have both relied on insurance units to build scale and pivot overseas. While neither name is well-known outside business circles, each boasts landmark assets. Fosun owns Cirque du Soleil and Club Méditerranée SA, while Anbang owns New York's Waldorf Astoria and Essex House hotels. HNA bought 25% of the Hilton hotel group last year.

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The investigation started on June 6, when officials at the China Banking Regulatory Commission held what was described as "urgent" conference calls, asking lenders to look over loans made to the five groups as well as the guarantees provided by banks to let them borrow overseas.

The goal, one of the people said, is to "examine those companies' leverage situations and risks." Banks are required to report the results of their checks to the regulator, which then will assess whether lenders should cut down their exposure to the companies, the people said.

Liu Zhiqing, an official at the banking regulator, declined to comment on the issue but said big companies are naturally a focus of the regulator when it comes to systemic risk, a phrase increasingly used by regulators.

Share prices of several listed units of the groups plunged Thursday on word that some banks have been selling the groups' bonds. Bank of China Ltd., for instance, began scaling back its holdings of Wanda-issued bonds in early June, tagging those bonds as "risky," according to a person familiar with the situation. China Construction Bank has grown increasingly cautious about exposure to HNA's international deals, according to a banker there.

Shenzhen-listed shares of Wanda Film Co., the entertainment unit of Wanda Group, which is controlled by billionaire Wang Jianlin, were suspended in the early afternoon Thursday after falling nearly 10%. In a statement, the company denied that banks had dumped Wanda's bonds.

Hong Kong-listed HNA Holding Group Co., a unit of HNA Group, fell 6%, while Fosun International closed down 5.8%. Anbang has no listed entities.

HNA didn't have an immediate comment. Rossoneri couldn't be reached. A Fosun spokeswoman said operations are normal; she didn't elaborate. Anbang didn't immediately respond to a request for comment. Wanda declined to comment on the probe.

The probe into these companies' borrowing is part of a broader government campaign aimed at safeguarding China's financial system from potential systemic risk ahead of a major Communist Party reshuffle later this year.

A surprise of this is regulators' questioning of high-profile private tycoons, who in many cases have ties to the party elite and hold positions on top advisory bodies. But Chinese President Xi Jinping has appeared less enamored than past administrations with the country's "red capitalists."

Mr. Wu's disappearance this month was the biggest name to face investigators since the brief disappearance in 2015 of Fosun co-founder Guo Guangchang for what the company described as assistance with investigations.

Anbang has described Mr. Wu's absence as temporary. Mr. Wu earned unwelcome attention for a since-withdrawn plan to help finance a Manhattan redevelopment owned by the family of Jared Kushner, U.S. President Donald Trump's son-in-law and adviser.

The headline-grabbing growth of businesses such as Fosun, Wanda, HNA and Anbang have appeared out of sync as China battles soaring debt levels and other economic challenges.

Of particular concern to regulators has been a surge in capital outflows, which pressured the Chinese yuan to weaken and shook confidence in the government's economic management. Since late last year, authorities have restricted the ability of Chinese companies to invest overseas and erected more hurdles for individuals to take money out. At a March forum, Pan Gongsheng, a vice governor of China's central bank, called some companies' overseas investment "irrational and abnormal," chastising them for making those investments with borrowed money and only for the purpose of transferring assets offshore.

Rossoneri's deal to buy AC Milan almost was derailed and was postponed by more than five months, until a U.S. hedge fund stepped in to back the EUR740 million ($826.6 million) deal, which made AC Milan the first fully Chinese-owned world-class soccer club.

Overseas direct investment by Chinese companies dropped 56.1% in the first four months of this year from a year earlier, compared with a 44.1% surge in such deals in 2016, according to official data. Meanwhile, capital outflows have slowed in recent months, and the country's foreign-exchange reserves have risen for four months in a row, to $3.054 trillion in May.

Just how indebted many of China's big conglomerates have become is extremely tough to gauge for outsiders.

The equivalents of parent companies for the Anbang, HNA and Wanda groups aren't listed and disclosure is thin. None of those groups have credit ratings from the big, global rating companies.

In December of last year, for example, S&P warned it could lower its credit rating on Wanda's main property unit, which had recently delisted from the Hong Kong stock exchange. S&P said that an increase in "business and financial integration" with the overall group weakened its credit profile.

HNA Group said it had around $104 billion in debt at the end of 2016. HNA has often used cash flow and assets from its units to finance other investments, a fact acknowledged by S&P in November when it lowered the ratings on some European transportation companies HNA was buying. S&P said it thought the group's financial policy was "aggressive" and its leverage was high. A company executive said recently he believes using leverage makes HNA a smart investor in the current low interest-rate environment.

Wanda's overseas buying spree has included $3.5 billion for film-production company Legendary Entertainment and $2.6 billion for AMC Entertainment Holdings Inc., the world's largest movie-theater operator. The company's $1 billion bid for Dick Clark Productions Inc. was scrapped earlier this year due to Beijing's recent capital controls.

--Phred Dvorak and Julie Steinberg in Hong Kong and Chao Deng and Grace Zhu in Beijing contributed to this article.

Write to Lingling Wei at lingling.wei@wsj.com, Wayne Ma at wayne.ma@wsj.com and James T. Areddy at james.areddy@wsj.com

(END) Dow Jones Newswires

June 22, 2017 10:37 ET (14:37 GMT)