Share on facebook
Share on twitter
Share on telegram
Share on whatsapp
Share on linkedin
Share on print
Share on email

Risk Watch: Analyzing HNA’s Future Directions

◎ Whether or not HNA can survive its financial troubles will have a significant impact on China’s debt crisis.


In 2016, HNA Group went on a global acquisition spree. One year later, the company pulled its brakes and has been selling its assets ever since. Whether or not HNA, a company which grew by expanding its debt, can survive its financial troubles will have a significant impact on China’s debt crisis.

The backdrop:

On Feb. 8, mainland Chinese newspaper Southern Weekly reported that HNA was facing a “credit crunch” in an article featuring the company’s “crisis timeline.” The newspaper noted that HNA’s current financial troubles are due to its low profitability, debt-heavy corporate strategy. However, Southern Weekly pulled the article and its author’s notes on investigating HNA before the newspaper went out to print, according to the journalist who wrote the piece.

The Southern Weekly article noted that HNA debt-heavy deal making quickly grew its balance sheet and its business, and allowed the company to cover up the various problems that arose from credit expansion as its assets appreciated. When the markets were stable, HNA’ strategy appeared to be “invincible.”

HNA’s recent troubles aren’t, in fact, recent. The “HNA expansion model” has for a while been built on “merger and acquisitions” and “capital chain crisis.”

HNA’s latest sale deals include:

Feb. 13: Hong Kong International Construction Investment Management Group (HKCIM) , a subsidiary of HNA, sold two pieces of land in Hong Kong’s Kai Tak Development that it bought in November 2016 to Henderson Land Development Company Limited for HKD 15.959 billion (about $2 billion), or a price that is 12 percent above what HKCIM paid.

Feb. 14: China HNA Group announced that some of its board members and senior management recently purchased some HNA-guaranteed offshore dollar bonds owing to optimism about the company’s long-term business development prospects. The amount spent on purchasing the bonds wasn’t disclosed. The move was intended as a signal to the markets that HNA has confidence for its future.

Feb. 16: C-Quadrat, HNA’s Austrian asset management firm, announced that it is cutting its stake in Deutsche Bank to 8.8 percent.

Why it matters: HNA’s expansion is the expansion of China’s financial bubble. Now HNA’s debt crisis is a reflection of China’s debt bubble shrinking (and may even burst). In other words, the fate of HNA is a microcosm of China’s debt crisis.

Our take:

1. With its debt-heavy M&A strategy and complex ownership structure, HNA is precisely the sort of “illegal large financial conglomerate” that China’s top banking regulator Guo Shuqing warned about in January and plans to punish. (See “Decoding China Banking Regulator Guo Shuqing’s Media Interview”)

2. HNA’s corporate strategy is reliant on an environment of rising asset prices, continuously rising land prices and financing, and its leveraged M&A as well as equity pledged financing. Somewhat akin to a Ponzi scheme, HNA’s strategy becomes unsustainable in an environment where asset prices fail to keep going up. And China’s economy presently faces pressure from America’s financial policies (tax cuts and deregulation; the Fed shrinking its balance sheet and raising interest rates). HNA is at risk of being pulverized by its huge debt.

3. HNA was able to pull off its strategy due to the environment fostered by Chinese Communist Party (CCP) rule:

  • 3.1. The CCP mandated that all land in China belongs to the “state and the people” while developers only have the right to build developments. So the HNA strategy is akin to a tenant (HNA) putting up the landowner’s (“state and people”) land as collateral to the landowner’s bank and using the loans to go on an acquisition spree. This scenario sees the tenant raking in the riches while transferring the risk of bankruptcy to the landowner.
  • 3.2 The CCP ties its political legitimacy to economic growth. Yet in the name of preserving “stability,” the CCP has allowed banks to have excessive liquidity, a situation that has resulted in a massive property bubble. Now that most residential debt is tied up in mortgages, the CCP is moving against wealthy financial elites. The Xi Jinping administration cleaning up the financial sector and the anti-organized crime campaign are also ultimately aimed at preserving CCP rule through securing economic stability.

4. HNA’s estimated loan balance from January to November 2017 is 637.5 billion yuan (about $100.4 billion), while Hainan Province’s 2017 GDP is 446.254 billion yuan. In other words, HNA is literally “too big to fail.”

We believe that the Xi administration won’t let HNA collapse, but will force the company to drastically scale down and sell its assets to pay off the debts it owes to the state-owned banks. If HNA refuses to comply, then Xi will go after the powerful groups behind the company via the anti-corruption campaign.

"I’m a very happy, satisfied subscriber to your service and all the deep information it provides to increase our understanding. SinoInsider is profoundly helping to alter the public landscape when it comes to the PRC."
James Newman, Former U.S. Navy cryptologist
“Prof. Ming’s information about the Sino-U.S. trade war is invaluable for us in Taiwan’s technology industry. Our company basically acted on Prof. Ming’s predictions and enlarged our scale and enriched our product lines. That allowed us to deal capably with larger orders from China in 2019. ”
Mr. Chiu, Realtek R&D Center
“I am following China’s growing involvement in the Middle East, seeking to gain a better understanding of China itself and the impact of domestic constraints on its foreign policy. I have found SinoInsider quite helpful in expanding my knowledge and enriching my understanding of the issues at stake.”
Ehud Yaari, Lafer International Fellow, The Washington Institute
“SinoInsider’s research on the CCP examines every detail in great depth and is a very valuable reference. Foreign researchers will find SinoInsider’s research helpful in understanding what is really going on with the CCP and China. ”
Baterdene, Researcher, The National Institute for Security Studies (Mongolian)
“The forecasts of Prof. Chu-cheng Ming and the SinoInsider team are an invaluable resource in guiding our news reporting direction and anticipating the next moves of the Chinese and Hong Kong governments.”
Chan Miu-ling, Radio Television Hong Kong China Team Deputy Leader
“SinoInsider always publishes interesting and provocative work on Chinese elite politics. It is very worthwhile to follow the work of SinoInsider to get their take on factional struggles in particular.”
Lee Jones, Reader in International Politics, Queen Mary University of London
“[SinoInsider has] been very useful in my class on American foreign policy because it contradicts the widely accepted argument that the U.S. should work cooperatively with China. And the whole point of the course is to expose students to conflicting approaches to contemporary major problems.”
Roy Licklider, Adjunct Professor of Political Science, Columbia University
“As a China-based journalist, SinoInsider is to me a very reliable source of information to understand deeply how the CCP works and learn more about the factional struggle and challenges that Xi Jinping may face. ”
Sebastien Ricci, AFP correspondent for China & Mongolia
“SinoInsider offers an interesting perspective on the Sino-U.S. trade war and North Korea. Their predictions are often accurate, which is definitely very helpful.”
Sebastien Ricci, AFP correspondent for China & Mongolia
“I have found SinoInsider to provide much greater depth and breadth of coverage with regard to developments in China. The subtlety of the descriptions of China's policy/political processes is absent from traditional media channels.”
John Lipsky, Peter G. Peterson Distinguished Scholar, Kissinger Center for Global Affairs
“My teaching at Cambridge and policy analysis for the UK audience have been informed by insights from your analyzes. ”
Dr Kun-Chin Lin, University Lecturer in Politics,
Deputy Director of the Centre for Geopolitics, Cambridge University
" SinoInsider's in-depth and nuanced analysis of Party dynamics is an excellent template to train future Sinologists with a clear understanding that what happens in the Party matters."
Stephen Nagy, Senior Associate Professor, International Christian University
“ I find Sinoinsider particularly helpful in instructing students about the complexities of Chinese politics and what elite competition means for the future of the US-China relationship.”
Howard Sanborn, Professor, Virginia Military Institute
“SinoInsider has been one of my most useful (and enjoyable) resources”
James Newman, Former U.S. Navy cryptologist
“Professor Ming and his team’s analyses of current affairs are very far-sighted and directionally accurate. In the present media environment where it is harder to distinguish between real and fake information, SinoInsider’s professional perspectives are much needed to make sense of a perilous and unpredictable world. ”
Liu Cheng-chuan, Professor Emeritus, National Chiayi University
Previous
Next