China's Communist Leaders Focus on 'Grey Rhino' Private-Sector Risks

 | Jul 26, 2017 | 12:00 PM EDT
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Ahead of a major leadership conference held only every five years, Beijing's Communist Party elite is increasingly concerned about the systemic threat posed by China's corporate expansion.

China's leaders appear to be taking aim at the country's largest private-sector entrepreneurs. Those tycoons, by building empires that span the country and sprawl from industry to industry, pose an increasingly mighty threat not only to the country but also, reading between the lines, to the leaders' own authority.

The Communist Party's new-found focus was made clear in a recent editorial in the People's Daily, the party's official mouthpiece.

China needs "to prevent both 'black swans' and 'grey rhinos,'" the newspaper wrote. "We cannot play down or ignore small signs of any types of risks."

As part of its increased scrutiny, China is pushing banks to examine lending to its largest conglomerates more carefully. Previously keen to see its companies expand overseas and gain international expertise, few questions asked, China's leaders have begun to worry about the scope and debt loads of some of its biggest companies.

It was no coincidence that the editorial came just after China's leaders concluded the National Financial Work Conference -- an agenda-setting meeting of regulators from the banking, securities and insurance industries that is held every five years.

The attention is all the more important since China is due to hold the 19th Communist Party Congress this fall. That meeting, the latest installment of another conference held twice a decade, will establish China's leadership for the next five years.

The term "grey rhino" was first used to refer to easily seen, massive but neglected dangers by Michele Wucker in her 2016 book The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore.

The Chinese version of the book came out this February. Its namesake risk is the opposite both in size and surprise from the "black swan," coined by Nassim Nicholas Taleb in his 2007 book of the same name.

It's timely that the Communist leadership should take up the capitalist term now. Wucker has for the last two years compiled a list of her top "grey rhino" risks for the year ahead that should keep investors and policymakers up at night. 

China sits in second place on this year's list, with its "intertwined economy and politics," behind only the U.S. political environment in terms of impact. Markets likely underestimate the size of China's problems, Wucker suggests. But its increasing interconnectedness with the rest of the world heightens the risk that a crisis in China would spill over, with provocations by the Trump administration raising the stakes.

Chinese banks have recently been ordered to run the ruler over lending to five of its largest companies, in a directive from the bank regulator, according to emails seen by the South China Morning Post

They include Anbang Insurance, which in April 2014 spent $1.95 billion on the Waldorf Astoria hotel. The company's chairman, Wu Xiaohui, is in police detention on unknown grounds.

Fosun Holdings and its overseas-listed subsidiary Fosun International (FOSUY) has also fallen under the regulator's searchlight. Likewise, its chairman, Guo Guangchang, was held by officials in 2015 for unknown reasons. The company's list of recent acquisitions includes the Club Med resort chain, the Cirque du Soleil and the English soccer club Wolverhampton Wanderers. But it was recently forced to deny speculation that Guo had been taken in again.

Banks have also been warned against lending to China's largest conglomerate, Dalian Wanda, which among other things has built itself into the biggest owner of movie theaters worldwide.

Wanda is already included in the group of five watchlist companies. But President Xi Jinping himself signed off on the order to bar state-owned banks from further lending to the group, according to The Wall Street Journal.

China is also demanding extra oversight with the HNA Group, a travel-focused conglomerate that is parent to Hainan Airlines. It is now the largest shareholder in Deutsche Bank (DB) but has a murky ownership structure whose members are rumored to include powerful members of the Communist Party, allegations which it denies. The company has a $60 billion line of credit from state-backed banks, a level of support normally reserved for state-owned enterprises that are carrying out government policy, according to The New York Times.

Rossoneri Sport Investment, the company set up by Li Yonghong to buy the Italian soccer club A.C. Milan for €740 million ($862 million), is also on the list of five. Its inclusion is unusual in that the company is purpose-built to acquire the club, rather than like the rest being a conglomerate operating in numerous sectors. But authorities appear to be worried about the sheer amount of debt the company used in the deal.

The Industrial & Commercial Bank of China (IDCBY) , the China Construction Bank (CICHY) , the Bank of Communications (BCMXY) and China Guangfa Bank are all conducting reviews of lending to the five companies, according to the emails seen by the SCMP.

Xi has coined his own term for rapacious corporations snapping up companies irresponsibly. After warning he would punish both corrupt "tigers" and "flies" within his own party, he has ordered punishment for "financial crocodiles" that destabilize the Chinese financial system.

Wherever in the menagerie they now fit, China's tycoons would do well to bear in mind that, no matter how large they become, they roam only at the behest of the Communist Party leadership in Beijing.

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