A plan by Chinese authorities to split up a business empire controlled by a mysterious missing billionaire has run into difficulty.
Beijing finds it’s not so easy to shrink a missing tycoon’s empire
The Tomorrow Group, the flagship corporate vehicle of tycoon Xiao Jianhua, is struggling to sell off its holdings because it is unable to agree on the value of key assets with potential buyers, according to public corporate filings and sources who are close to those deals.
Beijing has ordered Xiao to divest about $23.9 billion worth of assets this year to repay bank loans, the South China Morning Post reported last month.
The company had already divested about $16 billion (100 billion yuan) the previous year.
Sources say the sales are meant to break up a large, sprawling conglomerate with the kind of murky shareholding structure that threatens the stability of China's financial system.
Disappearance and divestment
Xiao Jianhua vanished from his residence at the Four Seasons Hong Kong in January 2017, in mysterious circumstances. Although it has emerged that he was apparently persuaded to return to the Chinese mainland to assist authorities with a financial investigation, he has not been seen in public since.
But Tomorrow Group and its hundreds of affiliated entities have been putting its stakes in banks and trust firms on sale in an act of “self-rescue by downsizing,” sources told the Post.
“The end game is to have a transparent structure that regulators can ‘see through’,” said one of the sources, who has been involved in the divestment deals.
The process will require the Tomorrow Group to sell multiple stakes in financial firms, the source added.
However, the process of downsizing is proving difficult, in light of increased vigilance by regulators.
On one hand, few potential buyers are willing to pay top dollar at a time when Beijing is trying to prevent the firms from becoming easy sources of capital for other would-be tycoons.
On the other hand, Tomorrow Group is reluctant to offer any discounts, as it is relying on these sales to repay its bank loans as required by Beijing, according to multiple sources familiar with the matter.
The handling of Tomorrow Group is part of Beijing’s broad efforts to bring the financial sector to heel to manage what it sees as outsized risks.
In February 2018, the government seized control of the Anbang Insurance Group conglomerate, one of China’s most aggressive buyers of foreign assets. It prosecuted former Anbang chairman Wu Xiaohui for economic crimes, and is restructuring the company.
In contrast, the government is allowing Tomorrow Group to strike its own deals.
Two sources have told the Post that Xiao is expected to stand trial by the end of June and the charges against him may be much lighter compared with the “fundraising by fraud” charges against Wu. This is likely thanks to his cooperation with the authorities, and willingness to shrink his business empire.
A complex web
China has seven different types of licenses for financial services, and Xiao is probably one of the few Chinese private entrepreneurs to hold all seven via a complicated web of direct and indirect holdings.
A characteristic of Xiao’s empire is that it was built upon personal links, under-the-table agreements and secretive arrangements known as “deals in the drawer,” instead of direct equity ownership that can be tracked, several sources said.
A Hong Kong-based person who had seen one of the “deals in the drawer,” said the deal was “basically a comprehensive cover-up plan of the real ownership structure.”
“It even includes answers to hypothetical questions from regulators or the media,” said the source.
Such arrangements – designed to avoid regulatory oversight, facilitate business deals or to skirt away from certain restrictions – are widespread in China. They are also a common way for members of powerful political families to conceal their wealth from public sight.
A well-informed source told the Post last month that Beijing now views such murky structures as a threat to the country’s financial security.