Ping An (HKG: 2318) has been asked by the Chinese Government to prepare a plan to take a majority stake - or at least control of - in Country Garden (HKG: 2007). This is the sort of plan which will appeal to the bureaucratic mind. It’s also something we’d not expect markets to like in the slightest. For the combination has the ability to wreck both companies, not just the one that’s already pretty much bust.
But this is the plan being floated: “Chinese authorities have asked Ping An Insurance Group to take a controlling stake in embattled Country Garden (HKG: 2007), the nation's biggest private property developer, four people familiar with the plan said. China's State Council, which is headed by Premier Li Qiang, has instructed the local government of Guangdong province, where both companies are based, to help arrange a rescue of Country Garden by Ping An, said two of the sources who have direct knowledge of the matter.”
It’s possible to see the logic being followed. A insurance company, Ping An, has lots of long term and patient capital. Country Garden needs vast amounts of long term and patient capital. So, stick the two together and problem solved, right?
Ping An share price from Google Finance
Country Garden share price from Google Finance
Except, well, no, it likely won’t work out that way. “A state-engineered rescue of Country Garden by Ping An would be one of the most significant interventions to date by authorities to support the cash-squeezed and highly indebted property sector, which accounts for one-quarter of China's economic activity and has sparked fears of a broader financial crisis.” Yes, obviously, we can see the motivation. “The authorities do not purportedly want the liquidity woes of COUNTRY GARDEN to spread across the wider economy.”
Sure. But the problem is not what they want, it’s whether it will work. Our own view on Country Garden (and here, here) is simply that the organisation has a negative value. This is not a cashflow issue, it’s a fundamental balance sheet one. The assets inside it are worth less than the debt and that’s it. At which point the only thing to do is force everyone to take their losses and then clean up the mess.
Transferring the problem onto the balance sheet of Ping An doesn’t change this. It just changes who ends up carrying that loss - the shareholders of Ping An and, quite possibly, the holders of insurance products from Ping An. That is, this isn’t a solution - as if it were merely a cashflow issue - but a spreading of the pain to those who didn’t have anything at all to do with the initial problems.
We do not think that’s an advance for the economy as a whole and it most certainly isn’t for Ping An. But then bureaucrats and economic management do not go well together, as we know.
