China Tycoon Questions Hit Markets Even as Growth Fears Fade

by Dramelin 2:00 AM 0 comments

China’s economy may be defying the bears, but the nation’s regulators keep tripping up the bulls.
Despite a backdrop of robust economic growth, stable employment and rising factory prices, Chinese stocks and bonds are lagging behind almost all their global peers this year as investors grapple with a series of regulatory surprises.
The latest bombshell came Thursday, when shares slumped on news that the government had stepped up scrutiny of the nation’s most active overseas acquirers -- including companies run by billionaires Wang Jianlin and Guo Guangchang.
While analysts said the move could be part of a broader campaign to curb risk in the banking system, the dearth of communication from regulators fueled unconfirmed rumors that the companies had been targeted for political reasons.
It was the latest reminder that macro-economic stability in China is no guarantee of steady markets.
“Caveat emptor,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.
If anything, China’s economic stabilization has heightened regulatory risk for investors.
Steady growth has given authorities a window to tackle excessive leverage in parts of the financial system and, now, take on some of the nation’s biggest conglomerates without jeopardizing the all-important economic expansion target.
The banking regulator has asked lenders to provide information on overseas loans made to Dalian Wanda Group Co.
, Anbang Insurance Group Co.
, HNA Group Co.
, Fosun International Inc.
and the owner of Italian soccer team AC Milan, people familiar with the matter said on Thursday.
Read more: China’s Dealmaking Tycoons Scrutinized by Banking Regulator The increased scrutiny, which surfaced less than 36 hours after MSCI Inc.
said it would include mainland shares in its emerging market indexes, is a vivid illustration that investors need to factor in more than just economic conditions and relative valuations when it comes to allocating money in China.
That point was hammered home again late Thursday after China’s broadcasting regulator ordered Weibo Corp.
and two other internet media firms to halt video and audio webcasting, accusing them of operating without a license and disseminating opinions potentially harmful to social stability.
Weibo shares sank 6.
1 percent in New York.
"China has always been about political risk," said Pauline Loong, managing director at research firm Asia-Analytica Pte.
in Hong Kong.
"Not in the western sense of who becomes president or whether the liberals or conservatives are in power.
The risk is that in China everything is linked: business, politics, financing, personalities, the regulatory process, the exchange rate.
" The Shanghai Composite Index has climbed just 1.
5 percent this year, versus an 11 percent gain in the MSCI All-Country World Index.
The Chinese gauge lost 0.
5 percent on Friday, after erasing early gains to close 0.
3 percent lower on Thursday.
To be sure, China is far from the only country with regulatory risk.
And while authorities’ latest move will do little to bolster near-term confidence in China’s markets, longer term it could ensure best practices are followed, said Edith Terry, author of “How Asia Got Rich: Japan, China and the Asian Miracle.
” "It has to be good news from the perspective of standards of corporate governance in China," Terry said.
It’s also the case that the risk of a systemic fallout from the banking crackdown into the wider economy appears to be low, for now.
China’s indebted companies are largely funded by domestic savings and foreign borrowing overall has been falling.
Zhiqing Liu, a deputy director at the CBRC, declined to comment on specific companies at a briefing in Beijing on Thursday, while saying that the regulator is generally concerned with systemic risks posed by big firms.
While it’s too early to gauge the fallout on the companies being targeted, the increased scrutiny suggests that China Inc.
’s record overseas acquisition spree has hit a wall.
 It also means that the certainty of future deals being completed has been thrown into doubt, said Keith Pogson, a Hong Kong-based managing partner at Ernst & Young.
"Historically the precedent in China was that if a deal was done, and was not challenged by the regulator, then others would copy and or innovate on that structure," Pogson said.
"This now suggests that the fundamental rules of the game have changed.
" As China Targets Serial Acquirers, These Deals Are Still Pending The rush by Chinese companies to snap up foreign competitors has shades of Japan’s massive global buying spree in the 1980s, when a pool of cheap funding led many companies to overpay for assets and take on too much debt, said Mark Williams, chief Asia economist at Capital Economics Ltd.
"That ended badly," said Williams.
"Chinese regulators don’t want Chinese firms to go down a similar path.