Das Evil Kapital


(China Vanke Chairman Wang Shi)

Speaking of the pot calling the kettle black, nothing sounds weirder than a Chinese real estate developer accusing a private insurer of bringing in sinful capital, which incidentally pushed up the former’s stock price to a historic high.

In what has become one of China’s most spectacular melodramas of the year, the attempted hostile takeover of China’s largest home builder, China Vanke, by a little known insurance conglomerate, Baoneng, creates a sense of intrigue so intense that it almost redefines how a corporate deal could be received by the Chinese society. In the process, it reveals the multi-layered, fantastic imagination that the society attaches to capital and those who wields it.

The substance of the event is pretty simple on the surface. In the time span of less than half a year, the Baoneng conglomerate has acquired tens of billions RMB worth of Vanke’s share through the stock market. Quietly, the insurer had become Vanke’s largest shareholder with 22.45% of its total shares by Dec 17, a dramatic increase from only 5% four months earlier.

Nothing in the public domain suggests that Baoneng’s operation violates any written rules. This is reflected in the authority’s largely ambivalent attitude toward the deal up to this point. China’s securities watchdog has openly expressed its willingness to “leave the matter to the market”, while its supervisory body for banking is “looking into” potential exposure of local banks to risks involved in the deal. But what Baoneng essentially does is disrupting Vanke’s carefully maintained shareholder structure that has been in place for two decades. The essence of that structure is highly dispersed shareholding that allows senior management a freehand in steering the company. Until Baoneng emerged on the horizon, China Resources, a state-owned conglomerate friendly to the Vanke management, had been Vanke’s largest shareholder owning about 15% of its shares. Other major shareholders held less than 6% combined.

This explains why those most unsettled by Baoneng’s move are Vanke’s senior managers, specifically its chairman, the 60-year-old Wang Shi.

In an internal speech made public on Dec 18, Wang makes it clear that he does not welcome Baoneng as Vanke’s no.1 shareholder. He sneers at the new comer’s business as risky and irresponsible, which will tarnish Vanke’s stellar reputation as China’s most credit-worthy home builder.

According to details revealed by the Chinese media, Baoneng financed its 40-billion-RMB stock market advancement on Vanke largely through margin financing, layers of collateralized loans leveraged by money from its sales of Universal Life Insurance that is often marketed as short-term investment products. In his speech, Wang blasts the financing model as excessively risk-taking. He is not without his points. Equity investment as a long-term investment strategy would put pressure on Baoneng’s short-term based money line. In an event of large-scale redemption of the ULI product or unexpected regulatory intervention, the insurer will face serious liquidity problems.

But Wang’s criticism of his fervent bidder goes beyond finance. His account of his first face-to-face encounter with Yao Zhenhua, the man behind Baoneng, betrays a hint of contempt: “He appeared not able to control his mouth… Nobody has heard of such persons before. They came out of nowhere and suddenly got very rich using leveraged money.

Unlike his “nobody” adversary, Wang has been the torch bearer of Chinese entrepreneurship for as long as “entrepreneurship” is valued in China. Being the founder of Vanke, Wang has led the legendary company for 31 straight years. Vanke was the second earliest stock ever listed on China’s Shenzhen Stock Exchange, with its trading code 000002 as a badge of honor.  Over the years, Wang has cultivated a larger-than-life public image that sets him apart from the typical “Chinese businessman”. He is adventurous, spending his leisure time climbing Mount Everest, kayaking in the torrents of western China and flying gliders over the sky. He radiates wisdom, taking three years off his corporate chairmanship to ruminate about Japanese history at Harvard; He advocates for a business culture that sounds refreshing for a Chinese audience: He claims that Vanke never bribes anyone to get business deals in China; He promotes high-quality, sustainable architecture and neighborhood; He serves as WWF US’s board member and delivers inspiring speeches at the world’s most prestigious green events.

The stark contrast between the public images of Wang and Yao creates an interesting tension that defines initial reaction to the Vanke-Baoneng conflict. Specters were somehow led to believe that there are two kinds of businesses, those that are benign and decent, and those that are hostile and crooked. Wang’s internal speech certainly helps create this impression by invoking the “barbarians at the gate” image, which spreads across newspaper headlines in the following days. The narrative was also enhanced by Wang’s influential admirers, the most excessive of which declares that “Vanke can lose Wang Shi. But China can’t lose him.” As a former chief editor of one of China’s most popular business newspapers puts it, Wang’s Vanke represents the “truthfulness, goodness and beauty” in the Chinese business community for its uphold of basic business ethics and rationality. The editor “shed tears” after learning about Wang’s current difficulties.

Whereas 30 years of relatively robust business does speak to the strength of Vanke’s business model and Wang’s leadership, whether it is a sign of its moral superiority is debatable. Actually many people were put off by Wang’s overtly ethical criticism of Baoneng, seeing it rather as a kind of biased arrogance. For Wang Shi, introducing the ethical argument into a corporate deal cuts both ways. While he can once again brand Vanke’s cleaner-than-thou business culture, some questions Wang’s fundamental business ethics of openly rejecting a perfectly legitimate major shareholder who may actually improve Vanke’s performance in the stock market. Interestingly, Baoneng issued a public statement on Dec 18 confronting Wang on the ethical question head on: “Where is the conflict between the pursuit of optimal, efficient capital deployment and an open, transparent social order?” In his speech, Wang speaks highly of Vanke’s regard for its hundreds of thousands of small shareholders. However, people also point out the contradiction that the management never did anything to boost the company’s stock performance, even when they had the chance to do so through a stock buyback in 2014. It turns out to be a fateful decision not to do so, as it hands Baoneng an opening (80% of Vanke’s shares were outstanding in the stock market at that time).

As financial observers are debating the wisdom of Vanke’s business decisions, and more importantly, the disturbing trend of insurance money flooding the securities market shopping for real estate equities, wider discussions about the deal are turning decisively “Olympian”. The dramatic clash between business titans teases out a deep-seated suspicion that big capitals are but proxies of more powerful interests behind them, and therefore their conflict must represent power struggles on a much higher level. In other words, this is modern China’s financial Trojan War, where the Greeks and Trojans are fighting on behalf of their rivaling Gods.

The theory goes that both Wang Shi and Yao Zhenhua are front-men of their respective political patrons, who belong to adversarial cliques of the Party. Wang’s unspecified patron controls the China Resources conglomerate (Vanke’s biggest shareholder before Baoneng’s bid), which has recently been disciplined under the anti-corruption campaign (its chairman was arrested last year). Baoneng’s attempt to seize control of Vanke is another assault on the big boss behind Wang Shi from its political rivals. The intriguing participation of Anbang Insurance in this financial drama further fuels this line of speculation. As Baoneng was making strides in the stock market, Anbang, a company widely associated with prominent “princelings,” quietly increased its stake in Vanke to over 6%, making itself the “swing vote” between the two fighting camps. If Anbang represents the will of another God which may decide the fate of Troy, is it Athena or Apollo?

A cautious mind would notice that this political reading of the Vanke-Baoneng deal shows signs of stretching reality to fit an imagination about the politics of Chinese elites. It assumes that the supposed political enmity among powerful party figures extends naturally from the political arena to the corporate realm through “proxies”, and that large Chinese corporations, no matter how complicated their financing is, can be neatly assigned to particular political figures who are involved in a zero-sum power game.

But this kind of alternative narrative does broaden the base of the story’s audience, as it proves to be something more “entertaining” than cold financial details. The abundance of conjectures and the shortage of ascertainable facts also make the story much more social-media-friendly, leaving most serious media outlets high and dry. One observer senses the irony in the popularity of the story: as something fundamentally non-relatable to most Chinese watchers, it manages to create an almost magnetic theatrical effect.

The vulgarization of the story does not stop at political gossips. Both Wang and Yao’s personal lives were added into the recipe to make it more flavory. In particular, Wang’s once high profile love affair with a young actress was held against him as indication of his sluggishness in recent years, which supposedly led to his unpreparedness in response to Baoneng’s ambush. It fits well into a misogynist tradition of Chinese classic stories, where the fall of a male hero is often blamed upon a seductive female partner. “All of a sudden many people jump out to teach Wang Shi, and everybody, a lesson: how women cost ambitious men their world.”

On Dec 21, Vanke applied for the suspension of trading in its stocks for as long as three months, citing “significant asset restructuring” as a reason. The move was widely read as a way to strike back at Baoneng, which faces liquidity pressure on its leveraged debts. A recent Caixin report reveals that Wang has been busy approaching potential equity investors to improve Vanke’s shareholding structure. But given the fact that very few shares outstanding remain on the market, it will not be an easy job.

Two days later, the mysterious Anbang Insurance issued a statement publicly supporting “the stability of Vanke’s senior management”, essentially busting the conspiracy theory that Anbang, and the political forces behind it, are set to overthrow Wang Shi’s real estate empire. With Anbang’s more than 6% share on Wang’s side, the situation improves almost overnight for Wang’s team. But Anbang’s real intention with Vanke remains unclear.

The general public probably will never know what actually happened behind the scene during these hectic days and nights of December 2015. No one is there to write the Chinese version of “The Barbarians at the Gate”, which is a lamentable fact for long-time observers of the country’s finance reporting scene. (Only Caixin’s detailed investigative report on the case is probably an exception.) No matter who emerges in the end as the winner of this bid for the control of China’s largest home developer, the loser is already visible: it’s the idea of “philosopher-king capitalists” as the progressive force to change China. The Vanke drama has revealed the fragility of the public image that Wang Shi and an entire class of so-called progressive Chinese capitalists have built for themselves. To the Chinese public, not only are their moral positions dubious, their independent agency is also under question. The widespread public perception that they are just puppets of much more powerful masters provides a real valuation of their moral capital in this country and how shaky their moral high ground really is. Expecting entrepreneurs like Wang Shi to provide the kind of moral leadership that can lift the society out of its value vacuum is almost like betting on Hector to win the Trojan War.