HNA’s shadow banking use in spotlight amid clampdown

CIRC orders Bohai Life to stop direct and indirect transactions with HNA companies for 6 months

By BLOOMBERG

Hong Kong • China took fresh steps to clamp down on HNA Group Co by banning it from conducting some financial transactions with an insurance unit for a half year, potentially drying up a source of funding for the debt-saddled conglomerate.

HNA’s Bohai Life Insurance Corp failed to report some related-party transactions, made some untimely disclosures and had a compensation system that didn’t meet regulatory requirements, the China Insurance Regulatory Commission (CIRC) said on its website on Wednesday. That led the regulator to order the insurer to stop direct andindirect transactions — including loans and financial aid — with HNA companies for six months.

Corporate filings seen by Bloomberg show Bohai Life has been a source of financing for HNA, which has been raising billions of dollars through shadow-banking products that are more expensive than traditional forms of borrowings but also less regulated.

It’s the latest setback for HNA, which has been under mounting scrutiny this year after a debt-fuelled shopping binge made it stand out as one of the country’s top buyers of global assets, putting the company in the crosshairs of a government that’s clamping down on capital outflows. The company has also faced questions from overseas regulators about its ownership amid allegations — repeatedly denied by HNA — that it’s tied to powerful Communist Party officials.

“This is a warning but it’sunclear whether the regulator will take further serious actions,” said Dickie Wong, ED of research at Kingston Securities Ltd in Hong Kong. “It’s best practice for them to stop all these complicated connected transactions.”

Bohai Life said in a statement it’s drafted an action plan to address the regulator and that the company will continuously improve its corporate governance to ensure it complies with regulations.

HNA, which has announced more than US$45 billion (RM189.9 billion) in acquisitions since 2015 including large stakes in Deutsche Bank AG and Hilton Worldwide Holdings Inc, is showing signs that its debt-fuelled expansion is catching up with the company. The group’s interest expenses more than doubled during the first half to about US$2.4 billion, more than any company outside of the US and Brazil, according to data compiled by Bloomberg as of yesterday.

HNA’s Bohai Financial Investment Holding Co, the biggest shareholder of closely held Bohai Life, fell as much as 1.8% in Shenzhen trading yesterday.

One example of Bohai Life’s dealings with the group involved combined investments of one billion yuan (RM640 million) in 2016 and 2017 into trust products — offering annual returns of 8.8% — linked to an affiliate called Changjiang Leasing, with the proceeds going to HNA Capital to pay back loans, according to Bohai Life’s website.

The CIRC, which also disclosed temporary bans to other local insurers on Wednesday, has been tightening scrutiny of the industry this year, seeking to prevent the eruption of any systemic risk as officials crack down on investments they deem hazardous.