China authorities ask Ping An to take controlling stake in Country Garden, sources say

[November 08, 2023]  (Reuters) -Chinese authorities have asked Ping An Insurance Group to take a controlling stake in embattled Country Garden, 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.

A spokesperson for Ping An said the company had not been approached by the government and denied the information reported by Reuters.

Ping An has "not been asked by (the) Government to takeover Country Garden. We categorically deny this story. It is untrue," the company said in a statement to Reuters.

The insurer, which vies with China Life for the title of the country's biggest insurance group by market value, declined to make its founder and chairman, Ma Mingzhe, available for an interview. Ma, who also uses the English first name Peter, did not respond to an emailed Reuters request for comment.

China's State Council Information Office and the Guangdong local government did not respond to requests for comment. Country Garden declined to comment.

Ping An's Hong Kong-listed shares finished 5.4% lower in heavy trade, wiping about $2.1 billion off its market value. Country Garden shares surged 12.2%, valuing the company at about $3 billion, and stocks of other Chinese developers also jumped.

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.

"If this is true, it will have a very significant positive impact on the property and capital markets," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

"Only equity injections, such as corporate takeovers or nationalisations, are likely to turn around the confidence of home buyers and investors and materially change the situation."

MITIGATING RISK

Authorities are keen that any risks posed by Country Garden's liquidity problems should not spill over to the wider economy, said three of the sources.

While in China companies can rarely ignore a request from the central government, the three sources said Ping An has been asked to come up with details of the plan and will have leeway to negotiate terms of any deal.

Talks between authorities and core Ping An leaders began in late August and are still at an early stage, said two of them.

Ping An has been asked to conduct due diligence on Country Garden, two sources also said, adding that authorities understood the insurer was a listed company answerable to shareholders.

A fifth person with knowledge of the matter said some talks between Ping An and the Guangdong local government about a rescue of Country Garden took place in September.

All sources declined to be identified due to the sensitivity of the matter.

Discussions between Ping An and authorities are being led by officials in the financial markets department of the People's Bank of China (PBOC), which is the central bank, and include Country Garden, said two sources.

The National Financial Regulatory Administration (NFRA) is also involved in the talks, they added.

The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China August 9, 2023. REUTERS/Aly Song/File Photo

Neither the PBOC nor the NFRA responded to Reuters requests for comment.

Authorities want Ping An to take a stake of more than 50%, according to one person with direct knowledge and one person briefed on the plan.

Country Garden's largest shareholder with a stake of about 52% is Yang Huiyan, chairperson and daughter of a co-founder. Reuters was not able to reach Yang for comment.

If Ping An were to become Country Garden's controlling shareholder, authorities would like it to inject capital in stages to ease the developer's liquidity problems, according to four sources.

The property developer last month missed a deadline to pay a $15 million coupon and the market has deemed it to be in default on its offshore bonds which total some $11 billion.

Country Garden has said it expects to be unable to meet all of its offshore debt obligations and hopes to seek a "holistic" solution to its difficulties.

Chinese authorities are eager to make the proposed takeover a possible template for other financially troubled developers, two of the sources also said.

GUANGDONG SOLUTION

Authorities are keen for the Country Garden's liquidity problems to be resolved within Guangdong, three sources said. Ping An was a natural choice because it is based in Guangdong and has been a major Country Garden shareholder, according to two of the sources.

Ping An said after the Reuters report that it no longer holds Country Garden shares. It held a 4.99% stake as of Aug. 11, according to Hong Kong stock exchange data.

A state-engineered takeover of one company by another is not without precedent in China. But there has not been one in the property sector since Beijing flagged measures in 2020 to tackle the industry's very high debt levels, triggering a liquidity crunch.

Although many other Chinese property developers, including giant China Evergrande, have defaulted on their debt, policy steps have mostly concentrated on lowering mortgage rates and relaxing rules so that it is easier for people to buy homes.

But in a sign that governmental authorities are willing to play a bigger role, China Vanke's top shareholder, state-owned Shenzhen Metro on Monday said it had prepared 10 billion yuan ($1.4 billion) worth of "market tools" to support the country's No. 2 developer.

Country Garden had total liabilities of 1.4 trillion yuan ($190 billion) at the end of June. It has more than 3,000 projects under development nationwide.

Ping An has been tapped by authorities as a rescuer for an ailing company before.

It participated in state-guided aid for Peking University Founder Group in 2021 and 2022. Its main unit, Ping An Life, was part of a consortium that was involved in restructuring the group's debt and then the unit took 67% ownership of the reorganised company.

($1 = 7.2846 Chinese yuan)

($1 = 7.8158 Hong Kong dollars)

(Reporting by Reuters staff; Editing by Anne Marie Roantree, Antoni Slodkowski, Don Durfee and Edwina Gibbs)

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