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When lossmaking Chinese iron ore miner Shandong Hongda scooped up a UK game developer in 2016, it also had grand plans to diversify into energy and healthcare businesses around the globe and move away from its low-growth mining past.
In the end, it held on to Jagex, the creator of the world's largest online role-playing game for just short of two years and its other plans have since fallen away too.
The trajectory of Shandong Hongda, with its brief stint as a game developer and ambitions to expand elsewhere, has been followed by a number of Chinese companies, which have attempted to make debt-fuelled leaps into countries and industries far from their areas of expertise.
But as credit conditions have tightened and authorities have taken a much more active interest in how much debt companies hold and the risks they are taking, businesses have drawn in their horns.
Since the start of the year, there has been a record sell-off of global assets by Chinese companies totalling about US$40 billion ($63.5b), according to data from Dealogic. At the same time, the pace of acquisitions has slowed to just US$35b, as businesses worry about being labelled speculative buyers. It is the first time in a decade that Chinese companies are net sellers of global assets.
"There is definitely an ongoing focus to de-lever," said Colin Banfield, joint head of global cross-border M&A at Citi.
"But we haven't seen this [affecting] corporations that have financed their deals responsibly and where those deals have been strategic in nature and in their areas of core competence."
The story of China's global buying spree, followed by its sell-off, is closely linked to domestic economic policies and the government's efforts to stimulate growth.
China loosened monetary policy in 2015 to combat slowing growth while also allowing for the central bank's surprise currency devaluation. Private investors such as Shandong Hongda took this as a signal to expand overseas, taking advantage of cheap debt to buy US dollar-denominated assets before the renminbi fell further.
By the end of 2016, China's foreign exchange regulator had clamped down on a number of speculative deals, and over the next two years some of the most prolific buyers — Dalian Wanda, HNA and Anbang — reversed their binge, selling tens of billions of dollars of assets in the process.
But liquidity conditions have hardly loosened since then. Speculative investors have found bank backing hard to come by and highly indebted companies are under increased stress.
"This comes back to the liquidity story and how speculative deals have become much more difficult to do these days," said Benjamin Crawford, Beijing-based counsel at law firm Allen & Overy. However, he added that there was still a "relatively strong pipeline of strategic transactions".
Cindy Huang, director of corporate ratings at S&P Global, said the liquidity profile of the entire Chinese market has shifted over the past year-and-a-half: "From 2018 onward it has been much tighter. The companies that expanded and acquired aggressively have found liquidity much more difficult to get this year."
The US has been at the centre of the Chinese sell-off this year, which has played out against the backdrop of a trade dispute between the two nations.
Chinese companies have sold US$26b in US assets in 2019, up from just US$8b last year. At the same time, they purchased US$7.3b in US assets, down from a peak of US$64.3b in 2016.
The pressure on China's US dealmaking is coming from both sides.
Since late 2018, the US government has increased its scrutiny of Chinese inbound acquisitions, especially in sensitive markets such as technology, but the pushback has also come to include any business that collects personal data.
Earlier this year, the US government committee that scans inbound investments for security threats told gaming company Beijing Kunlun and Chinese biotech group iCarbonX to divest from companies they had previously purchased — dating app Grindr and health research app Patientslikeme, respectively — because of concerns about the Chinese government accessing customer data, people familiar with the situation have said.
At the same time, the Chinese government is also putting pressure on domestic businesses to divest US assets in retaliation to the trade dispute, according to Aaron Cutler, a partner at law firm Hogan Lovells in Washington.
"As part of the broader trade war, the Chinese government is putting some soft pressure on its businesses to sell off US assets," said Cutler, a former senior staffer at the US House of Representatives. "But they are also being pressured to bring that capital back to China."
"I do expect this to continue for the next several months until there is a clear end-date to the ongoing US-China trade dispute," he added.
In the largest Chinese sale of the year, a group of private equity investors led by property developer China Vanke and Hopu Investment Management, sold the US assets of Singaporean warehouse business GLP to Blackstone for US$18.7b.
The transaction included government investors such as Bank of China Group Investment and was regarded by some bankers as a state-sanctioned deal and not one driven by the squeeze on liquidity.
But the government also wants to clean up a number of investments that went wrong and this is expected to continue into next year.
In the second-largest Chinese sale of the year, Anbang Insurance, which was taken over by the government in 2017, sold a US hotel portfolio to Korea's Mirae Asset. Anbang, which has since changed its name to Dajia Insurance, required a US$10b government bailout in 2018, reflecting the company's liquidity strains.
In some cases, state groups have swooped in and global assets have moved from one Chinese owner to another.
Chinese energy group CEFC, which attempted but failed to buy a US$9b stake in Rosneft in 2017, bought a stake in Czech airlines group Travel Services in 2015.
Following the detention of the company's chairman, some of CEFC's assets were divided up among state-owned companies, including Travel Services, which was bought by state conglomerate Citic.
An investment banker who has worked directly with some of the companies now selling off assets said: "The government is still guiding many of these transaction and cleaning up some of the mess that's been made over the past few years."
Written by: Don Weinland
© Financial Times
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