US probe rings alarm bells

Chinese insurer expands overseas investment portfolio, but us raises queries over purchase of landmark hotel

The US government's announcement that it will investigate the Anbang Insurance Group's purchase of New York's iconic Waldorf Astoria hotel has jolted Chinese insurance companies looking to buy landmark properties and companies overseas.

On Oct 6, Anbang, an integrated conglomerate of companies selling insurance as well as assets management and banking services, said it was buying the Waldorf Astoria for $1.95 billion from Hilton Worldwide.

One week later, the US government said it would investigate the purchase based on security concerns. The acquisition "could impact the (US) government's storied relationship with the hotel", CNBC reported.

According to the terms of the sale, Hilton will continue to run the hotel for 100 more years and Anbang would make major renovations to the building. US officials says the remodeling has raised concerns in Washington, which is weary of Chinese espionage, because the hotel serves as the home for the US ambassador to the United Nations and hosts the US president and hundreds of US diplomats during the annual UN General Assembly.

"Though China and the US are not hostile nations, a competitive relationship does exist and there are suspicions," says Lu Jinyong, a professor of international business and cooperation at the University of International Business and Economics in Beijing.

The US government may be suspicious of Anbang's background and history, Lu says. The insurance firm was established in 2004 and rapidly grew into a company of 30,000 employees with assets worth 700 billion yuan ($114.4 billion; 90.5 billion euros). Despite Anbang's deal with Hilton, the acquisition could be blocked if it does not pass muster of a US government inquiry.

The underlying thread of suspicion lies in cultural differences, he says.

"US officials may have difficulty understanding why the Chinese company must redecorate the hotel, prompting them to suspect there is the possibility of espionage.

"This is because Westerners like their historical and cultural landmarks untouched, while Chinese people want the way they look to be new."

"As more and more Chinese companies look overseas for business opportunities, we should be more aware of the risks caused by cultural differences and differences in legal systems."

Frank Chen, executive director at property research firm CBRE Group, believes Anbang is buying the Waldorf Astoria to produce a higher yield on their investments.

Other analysts say that if the deal is successful it will improve Anbang's ability to obtain funding overseas and will help it in marketing itself internationally.

"In the US, the annual yield of an investment in an office building usually hovers around 4 to 5 percent, but the return of a hotel investment maybe as high as 8 percent. The biggest concern for an investment in a hotel could be volatility during a particularly slow season. But for a well-known landmark hotel, the risks are much lower."

"Due diligence is necessary to ensure that companies are selecting an appropriate object for a merger or acquisition," says an expert who specializes in mergers and acquisitions and refused to be named because of regulations at the advisory company he works for.

For cross-border mergers and acquisitions, he offers several key tips. The biggest risks, more often than not, come from buyers incapable of running the business properly after the acquisition, he says. It is also important to hire an intermediary familiar with legal and political conditions at home and abroad.

"I would suggest that Chinese companies take their development strategy and operating capacity into account to ensure that the merger meets their expectations."

In recent years, more Chinese companies have invested heavily overseas. Statistics from the Ministry of Commerce show that direct investment on foreign companies in the first three quarters of this year was 460.64 billion yuan ($75.3; 59.6 billion euros), a 21.6-percent increase over the same period last year.

Investment in overseas real estate has soared since 2013, with nearly $16 billion spent on foreign real estate last year and $8.5 billion spent from January to September this year. In 2008, that figure stood at $70 million (55.4 billion euros), according to 21cbn.com.

"In the domestic market, the price of real estate for a good location is already too high. So the timing is good for overseas realty investments, given the relatively sluggish economy in foreign markets, especially Europe," says Zhang Dawei, principal analyst of the Centaline Strategic Management Ltd, as quoted by the Beijing Times.

Guo Yi, chief marketing officer of Yahao Real Estate Selling and Consulting Solution Agency, agrees.

"The domestic commercial property is at its peak, and there is the risk that the sector could fall. But the foreign real estate market is still tanking."

But the push by China's insurance industry to buy overseas real estate did not begin until July last year, when the China Insurance Regulatory Commission adopted new regulations to ease restrictions on overseas investment by insurance companies. The new rules allow insurance firms to utilize 15 percent of their total assets for investments in and out of China.

The first was Ping An Insurance (Group) Co of China Ltd, bought the Lloyds of London building for 260 million pounds ($387 million; 330 billion euros) in July last year.

Then the China Life Insurance Co, in cooperation with Qatar Holding, bought 10 Upper Bank Street, a building on Canary Wharf, for 795 million pounds. That was followed by Anbang's acquisition of the Waldorf Astoria.

This July, Milan-based agency Dagong Europe estimated that China's insurance industry will develop significantly amid regulatory reforms. It predicts the size of the industry will increase by around 15 percent from 2014 to 2015.

But Hao Yansu, director of the School of Insurance at the Central University of Finance and Economics in Beijing, is not expecting sustained growth in overseas investment from Chinese insurance firms.

"Out of the more than 170 Chinese insurance companies, three buildings were purchased, which does not represent any overseas investment rush," he says.

There were 174 insurance companies in China by the end of last year, with total assets worth 8.3 trillion yuan ($1.35 trillion), the China Insurance Regulatory Commission said in July.

"I have not observed any trends in large state-owned companies buying overseas assets, in spite of some individual cases. And the movement of smaller private companies will not influence the bigger picture," Hao adds.

In August, the People's Insurance Co of China disclosed that it had been seeking real estate investment opportunities in Europe without any results.

"Compared to assets in the US, those in Europe are more attractive in terms of an investment return. However, the best time for investing may now be over," said Yang Jun, deputy general manager of financial assets management at the company.

In addition to the acquisition of the Waldorf Astoria, Anbang announced this month that it was buying Belgian insurer Fidea, though it did not disclose a price for the acquisition. It is also said to be ursuing a controlling stake in Woori Bank, according to South Korean media outlets.

Anbang says this is the first time a Chinese insurance company has made a complete purchase of a European insurer and that it will keep seeking opportunities to buy overseas insurers to form a global service network.

"The Anbang Insurance Group is a rather aggressive company," says the insurance expert Hao Yansu, who adds that the firm's zealousness contrasts with the lack of interest in China for expanding overseas after what befell Ping An in 2007.

That year, Ping An bought a 4.99-percent share of Brussels- and Amsterdam-based Fortis for more than 20 billion yuan. In April 2008, Ping An wrote off 2.8 billion euros for a half share of Fortis, which was then bailed out by three European governments.

But as the global financial crisis hit, Ping An lost more than 10 billion yuan on its initial investment and had to drop its takeover attempt.

"It is difficult to predict whether Anbang's acquisition this time will pay off. Few people in China's insurance industry have ever heard of Fidea," Hao says.

In addition to its headquarters in Antwerp, Fidea has a regional office in Namur, Belgium, that employs about 360.

"With Anbang, Fidea will be part of a strong insurance group that is searching for sustainable investments outside their homeland. We are very pleased that they have chosen Belgium as the first European country for their expansion, and of course, the choice of Fidea in particular," Fidea CEO Edwin Schellens said in a statement.

Hao, thus far, thinks Anbang is making the right moves.

"No one will be putting their eggs in one basket. What matters is not the location of the assets they acquire, but the strategy of the individual company."

Contact the writers through chengyingqi@chinadaily.com.cn

(China Daily European Weekly 10/24/2014 page22)