Legal & Regulatory

Vanke On China's Regulatory Gaps and Governance

December 24
5:34 AM 2016

The tussle for control of China Vanke, the country's largest property developer with more than 200 billion yuan in annual sales, appears to have ended after interventions by the Chinese securities and insurance regulators.

The barbarians stormed Vanke's gate, but the battle ended before fighting actually began. What took place over 12 months wrecked havoc on minority shareholders and laid bare the shortcomings in the coordination and communication in China's financial regulations.

Here's a look at some of the issues that have been exposed:

● Funding Source and Shadow Banking

The story began in December 2015, when Shenzhen-based Baoneng, a property developer and insurer, emerged from nowhere to declare a 25.4 per cent stake in Vanke, along with the intention of replacing the developer's senior management.

It turned out that Baoneng had used premium from its popular Universal Life Insurance product -- which promises policy holders short-term returns -- as well as leveraged loans from asset management plans to build up a 43 billion yuan war chest to finance its accumulation of Vanke shares.

Raising money through multiple layers of banks, security firms, insurance and even online platforms was a "crazy capital game," said the Wuhan University of Science & Technology's finance researcher Dong Dengxin.

● Governance Mess

Vanke's chairman Wang Shi, a marathoner and Everest mountaineer, to fight back to repel Baoneng's entreaties, but not before dismantling the veneer of his company's corporate governance. Vanke suspended the trading of its shares on the exchanges of Hong Kong and Shenzhen on December 18 last year, declaring a "material asset restructuring."

Vanke proposed to issue new shares to buy assets from Shenzhen Metro Group, using the city's subway operator as its white knight. The plan would dilute the holdings of every major shareholder, especially Baoneng's stake, removing its takeover threat.

Minority Shareholders' Interest

Owned by tycoon Hui Ka-yan, Evergrande began accumulating Vanke shares from the open market, with successive disclosures that raised its holdings from 5 per cent in August until it reached 14.07 per cent. All in, Evergrande spent an estimated 36 billion yuan buying Vanke's shares. In the process, Vanke's A shares jumped from 17.88 yuan in Shenzhen to a record 27.72 yuan.

In early December, a year after Baoneng declared its hand, China's regulators took action.The China Securities Regulatory Commission's chairman Liu Shiyu went off-script during a speech in Beijing, and took time to denounce companies that had used unauthorised funds to finance their leverage buyouts as "barbarians," "robbers' and "ghouls."

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