Monday, July 31, 2017

Tightening debt could put overseas firms at risk

Tightening debt could put overseas firms at risk

Source:Global Times Published: 2017/7/30 17:33:39

Illustration: Peter C. Espina/GT

Image result for Chinese owned Landbridge's global expansion
Image result for Chinese owned Landbridge's global expansion

Chinese privately owned Landbridge Group has been in the headlines in Australia recently. In 2015, the Chinese company paid A$504 million ($402.52 million) for a large number of terminals, land and facilities at the Port of Darwin, including a 99-year lease on the port. According to media reports, Landbridge pledged to spend more than A$1 billion expanding the Darwin port and reclaiming land so as to establish a logistics center and to build the port as a gateway between Australia and Asia.

Local critics believe that Landbridge's global expansion in Australia and Panama is highly consistent with China's opening-up strategy. Landbridge also bought a port in Panama for $900 million in 2016. A Financial Times report on July 18 cited one of the critics as saying that Landbridge can get favorable government financing by "aligning closely" with China's "Belt and Road" initiative. Moreover, the company may face financial risk as a result of its highly leveraged acquisition of overseas assets. According to an article of the Financial Review published on July 4, Landbridge has struggled to make interest payments on loans for the Darwin lease. The Australian Strategic Policy Institute, a local think tank, alleged that after a number of failed bond issuances in 2015 and 2016, Landbridge is now making efforts to secure funding from the China Export-Import Bank.

What Landbridge has encountered is not uncommon for Chinese companies in overseas expansion. There are also other Chinese companies subject to similar questions. Since 2008, the number of Chinese companies investing abroad has increased rapidly. With outbound direct investment by China's non-financial companies surpassing $100 billion, China has become one of the major countries investing overseas in the world. According to data collected by Anbound, against the background of the sluggish global economy, China's outbound direct investment surged 44 percent year-on-year to $183 billion in 2016, making it the second-largest global investor after the US. During the same year, China's net outward direct investment was $49 billion.

It should be pointed out that the financing convenience is an important reason behind the rapid overseas expansion of Chinese companies. In previous years, against the backdrop of the continuous appreciation of the Chinese yuan and policy encouragement, both State-owned and privately owned companies relied heavily on financing. If overseas investment projects could be linked to China's national strategy, they were often able to receive loans or credit lines from State-backed policy financial institutions (such as the China Development Bank and the China Export-Import Bank) and several commercial lenders. The convenient financing of Chinese companies is the competitive edge envied by many foreign companies. In many cases, while competing for overseas acquisitions or investment, financing can even beat technology or a well-known brand as an advantage.

However, convenient financing has come at the cost of debt expansion. If debt grows beyond a certain extent, banks will be concerned about risk. Another important variable is that Chinese companies' overseas investment and cross-border capital transfer can be easily influenced by policy factors. Over the past two years China's policies on foreign investment and financing have changed. This is because of an accelerated capital outflow, the yuan's depreciation against the dollar and the considerable drop in foreign exchange reserves. With tightening control over cross-border capital transfer, Chinese companies, especially private ones, started to feel increasing pressure from debt and financing. In particular, since April 2017, the relevant policy tightening has become an overhaul in financial regulation, restraining the foreign investment of some large groups. Anbang Insurance, HNA Group, Fosun Group, Wanda Group and other companies interested in overseas investment have been subject to different degrees of restriction.

For a long time, the rapid growth in China's overseas investment and China's seemingly limitless financing ability have formed the impression that Chinese companies are rich. While such an impression could help companies win overseas projects, quite a number of the projects may face financing problem due to the current policy tightening. If the subsequent funding cannot keep up, then many of overseas projects will inevitably face debt risk. And if a group of Chinese companies failed in overseas expansion due to debt and financing problems, it will lead to another round of skepticism toward Chinese companies in the international market.

Encouraged by the "going out" policy, Chinese companies have become a fresh force in global investment over the past decade. But the massive foreign investment and acquisitions are based on convenient financing and debt expansion. Now things have changed, and if the government tightens the policy too much, it may trigger growing debt risk for Chinese companies in overseas investment.