It’s been a rough first couple of months of 2018 in more ways than one. In the business of global Chinese travel, and China in general, the same sentiment rings true as well. So far this year, HNA looks one step closer to collapse with each day that passes, Anbang has been taken over by Chinese authorities, Marriott and many other international businesses ran afoul Chinese nationalists, and now, a new tariff on metals from the Trump administration looks like it may be the beginning of a trade war. While it’s impossible to say where all this will take us, one thing is for certain: we may be seeing the end of Chinese hospitality investments—at least in the Western world.
In 2016, Chinese investments in the hospitality industry were at their height and there were many deals that passed the $1 billion mark. These included Anbang’s $6.5 billion acquisition of Strategic Hotels & Resorts, HNA Group’s $6.5 billion stake in Hilton, and Ctrip’s $1.7 billion acquisition of Skyscanner.
Anbang’s attempted US$14 billion acquisition of Starwood would have broken all previous records had it not lost out to Marriott. In total, some 33 acquisitions valued above the proposed $1 billion limit were completed in 2016 according to the Financial Times. In other words, it seemed like a good time to own tourism and hospitality stock and just sit around and wait for a Chinese suitor—or a bidding war initiated by a Chinese suitor.
Sitting around waiting for a chinese suitor used to be a sound strategy in the hospitality industry
However, political and economic events in 2017 dramatically shifted the landscape once again. Xi Jinping’s anti-corruption campaign resulted in a more modest, heavily divested Dalian Wanda—a 180-degree change from the boastful and internationally aggressive Dalian Wanda of 2016. For HNA and companies like it, astronomical levels became a bigger burden than they initially estimated. Meanwhile, regulators in both the United States and Europe started taking a keen interest in opaque business dealings with even more opaque Chinese companies that had started taking both continents by storm.
It all extends to other businesses too, particularly in the United States. For example, the Chinese tech giant Huawei was blocked from selling its products through carriers in the U.S. market over national security concerns.
Meanwhile, it was revealed that Chinese auto manufacturer Geely bought a $9 billion stake in German Daimler just a few days ago. At the same time, Chinese stakes (and outright ownership) in other German businesses are under scrutiny.
To illustrate just how quickly things have changed, we can look at the status of Sino-American deals that at one point were underway. According to Bloomberg, $72 billion worth of U.S. takeovers and real estate deals by Chinese businesses have been terminated or withdrawn since the beginning of 2015. In the same time frame, some $69.8 billion worth of deals were completed.
The value of terminated and withdrawn deals is now higher than that of completed deals
And many of the deals that did go through are now in jeopardy as well—or in the case of Anbang, already in the hands of the Chinese government after a crackdown. The odds are quite low on HNA going the way of Anbang, which would mean that Chinese authorities will also be in control of the largest single stake in Deutsche Bank, a German airport, Swissport, Gategroup, and $6.5 billion worth of Hilton stock.
For a Chinese government concerned about structural economic instability, it goes without saying that heavily indebted big employers like HNA are too big to fail. As a matter of fact, a bankrupt HNA with grounded flights (not a distant prospect considering recent news) would be disruptive to Chinese tourist flows owing to the large number of international routes its airlines are running.
The fate of Anbang and what it implies about how the Chinese government intends to deal with China’s big, and sometimes failing, international investors make the jobs of U.S. and European regulators even more difficult.
While the risks associated with widespread use of Chinese telecommunications equipment in the United States are quite obvious, the same can’t be said of the tourism and hospitality industry. Does it really matter if a gigantic airport ground and cargo handling company is owned by a Chinese company? What about an international hotel group or a cultural icon like the Waldorf Astoria? Probably not.
Chinese hospitality investors are too big to fail, raising concerns even further
However, with Anbang now operated by the Chinese government, that changes things on a fundamental level. It’s no longer a question of companies being run or owned by a Chinese company but about the risk of the Chinese government taking these companies over. If Anbang’s acquisition of Starwood was successful, the Chinese government would today be in control of close to 200,000 employees and 1,200 properties through its forced takeover of Anbang’s operations.
It’s fine to have differing opinions on whether that’s such a bad thing, or even so different from being run by a private (or at least, more private) Chinese company. Even so, with greater scrutiny from regulators and what might turn into a U.S.-China trade conflict looming, it’s safe to say that it will, indeed, be viewed as a bad thing. Combine that with the fact that the Chinese government can essentially take over (or stop financing of) domestic companies at will, and you have a strong case for a less-than-bright future for Chinese hospitality investments in the United States in particular, but even the greater Western hemisphere.
China can essentially take over any company at a moment’s notice
Lastly, and perhaps at least as important is that the Chinese government appears to have little interest in strategic Chinese ownership of tourism and hospitality businesses as of late. The recent, and massive, Geely investment in Daimler raised no concerns, and Chinese investments in high-tech industries have been met with little resistance from Chinese regulators (the same can’t be said of Western regulators). China, hoping to acquire foreign technology and technical know-how to boost domestic industries, probably feels like it has less to gain from hospitality and real estate.
In the end, Chinese tourists remain on the move and a major contributor to tourism and hospitality businesses around the world. Chinese capital, on the other hand, looks like it will be traveling to other destinations for the time being.