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Why China Is Shooting Its Gray Rhinos

 Two Different Smashes: Wanda’s Purgatory, and ‘Wolf Warriors’ Patriotic Win

“It is like an awful car crash. You know you shouldn’t look. But at the same time you can’t turn away,” said one senior China film executive of the financial woes that have wrecked the summer of Wanda, Fosun, LeEco, and other previously high-flying Chinese conglomerates. Yet, for those who continue to look on at the aftermath of the summer smash-up, two trends emerge.

First, that political risk should be moved far higher up the agenda in any Sino-international dealing. Second, that China is now a major player that has enough momentum and scale to affect global industry. However alien its rules and methods are to Wall Street and Burbank, or how tricky its is to read the political tea leaves, China counts for too much to be ignored — as a current smash of the other kind demonstrates.

Global box office in the first three weeks of August was dominated by “Wolf Warriors II,” a “Rambo”-style war actioner that has triggered wide acclaim and repeat viewings in China. It has also gone some way to restoring Chinese theatrical fortunes and a degree of pride in an industry which, over the past year, has suffered a bitter box office reality check. Half a billion dollars grossed in 11 days can do that.

In a similarly brief matter of days in July, property to entertainment behemoth Dalian Wanda was rudely bumped from a position where it was denying that state investment funds were selling its shares and corporate debt, to one where it was announcing a hastily-arranged $9 billion asset sale.

Selling the theme park and leisure businesses that were last year portrayed as a “wolf pack” capable of ravaging Shanghai Disneyland, as well as a package of hotels, was not simple corporate probity. It was a necessity. That’s because China’s commercial banks have explicit instruction to halt lending to Wanda and three other acquisitive private sector giants, often described as “gray rhinos.”

The Chinese government is now in safari mode, hunting down companies that fail to play the game the government wants, and especially those may have damaged the financial system in the process. Some banks have already been fined for allegedly helping Wanda breach capital control restrictions.

While many Chinese companies spoke of the lessons learned from past Japanese and German misadventures in Hollywood, and of not wanting to be regarded as an ATM, Wanda increased its borrowings and became the most aggressive acquirer of international movie assets. It even bid for Paramount Pictures.

While several of its deals were in the — relatively — safe exhibition space, Wanda’s $1 billion bid for Dick Clark Productions was seen as a deal too far. A year earlier, Wanda apparently caused outrage in senior political echelons with its $3.5 billion leveraged purchase of Legendary Entertainment.

LeEco, the technology and video streaming business which financed box office bombs including “Gods of Egypt” and “The Great Wall,” is now cancelling acquisitions and slashing operations. Its over-expansion problems are similar to Wanda’s, if slightly smaller. And it lacked the political connections that helped gray rhinos Wanda, Fosun, Anbang and HNA run ahead of the pack. It was enough that regulators tipped the balance. LeEco’s creditors and shareholders are now doing the rest of the dismantling.

The degree of political intervention may be a surprise to Hollywood. Smart deals will continue to get done. But there are now at least four financial sector regulators scrutinizing every significant overseas acquisition proposed by Chinese firms.

Intervention started from macro-economic and political concerns: about capital outflow; protecting the strength of the currency; stabilizing wobbly stock markets; and reducing massive levels of debt at local government and corporate level. Apparently, unleashed by president Xi Jinping in person, regulators subsequently started firing at the rhinos when some overseas deals, especially in sports and property, looked more like money laundering than normal business transactions. And when expensive acquisitions in Hollywood failed to advance the government’s overseas cultural agenda.

“The most immediate impact is to restrict Chinese investment in the foreign movie industry, including production, distribution and exhibition. Motivated by concern over excessive corporate borrowing and the erosion of foreign exchange controls, the result will be to reduce opportunities to introduce foreign experience into China’s domestic industry and extend China’s soft power in the international movie industry. It is coupled with efforts to tighten (Communist) Party control over content in the culture and entertainment industries more broadly,” says Lester Ross, managing partner at the Beijing office of law firm Wilmer Hale.

“Without as much Chinese M&A, there will be a return to project-by-project cooperation. Cooperative movie projects have not been a great success in the U.S., however. There is also intensified diplomatic effort by the U.S. government and industry to raise Chinese limits on the number of foreign films that can be exhibited in China on an annual basis as well as the terms by which revenue is shared. However, there is no sign that Chinese content restrictions are being relaxed. To the extent that the Chinese market remains attractive, the U.S movie and similar industries will remain reluctant to embrace any content that may be perceived to be anti-Chinese, while favoring content that is attractive to Chinese consumers.”

Few in China are shedding tears for Wanda. “There has been far too much capital and too little professionalism in the Chinese film industry,” said one veteran executive from Beijing. “As far as international is concerned, this shakeout is somewhat helpful. It should scare away people who are not serious about building businesses in China. It may open the door to companies like Netflix and Amazon, which are not coming to China seeking money.” (China does not welcome foreign media conglomerates and, so far, neither company has more than the merest toehold in the Middle Kingdom.)

Several commentators have pointed to the government’s intervention as being part of an anti-liberal crackdown ahead of the once every five years Communist Party Congress. But that may not be the case.

Just as likely, the gray rhinos may simply be the latest on a to-do list of things to clean up. The government is seeking to eliminate corruption, build healthy businesses, and stabilize the financial system ahead of the next downturn – or trade war. Rumors suggest that there will be jail time for some executives, and that insurer Anbang could be broken up or nationalized.

It is unclear if that is also to be Wanda’s fate. “Wanda’s exhibition business is professionally run and probably carrying little debt. So there is little reason to think that at least will not survive intact,” said the veteran executive.

And, if the top conglomerates have failed to deliver the political gains that Xi Jinping wants, there are others which are more pliant. StarTimes is a Chinese telco, scarcely known in the West, but which has a low-cost pay-TV business in 30 African counties. It is delivering a diet of mainstream Chinese content to millions in China’s client states across the continent.

China also has a band of state-owned enterprises ready to do their political masters’ bidding. These may not be the wheeler dealers that Hollywood moguls would see as kindred spirits. But then the U.S. was never part of the Belt and Road Initiative, nicknamed the New Silk Road, a Chinese trade and infrastructure outreach program of exactly the kind that Trump’s America is abandoning.

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