- The potential collapse of HSBC's $9.4B Ping An deal took complex twists and turns
- Most plausible explanation is a change of heart by a senior Chinese official for the deal
- People familiar with CDB say the report by Caixin triggered an internal investigation
Even by the Byzantine standards of business deals in China, the twists and turns in the potential collapse of HSBC's $9.4bn exit from its stake in Ping An Insurance are exceedingly complex.
But the ultimate reason that threw the sale in doubt may be quite simple. The most plausible explanation is a change of heart by a senior Chinese official, according to bankers in China and Hong Kong.
CP Group, a Thai conglomerate with a focus on agribusiness, was announced in early December as the buyer of the 15.6 per cent shareholding, much to the surprise of observers who noted that the purchase price was bigger than CP's net assets.
Scepticism about whether CP could pull off the deal melted away, however, when HSBC said that China Development Bank would provide financing. As a government-owned bank with powerful connections, CDB's presence was an indication that the deal had high-level backing from Beijing.
Things became less clear when Caixin Century Weekly, a Chinese financial magazine, reported that a couple of private investors were the real buyers of the first tranche of Ping An shares supposedly purchased by CP.
Xiao Jianhua was named as one of these investors. Mr Xiao, a financier with such a low profile that few veteran China bankers had previously heard his name, denied the report through his lawyer.
People familiar with CDB say the report about Mr Xiao's involvement triggered an internal investigation about whether to proceed. The conclusion was that it was too dangerous, leading to CDB's decision to pull the financing -- and potentially scuppering the remainder of HSBC's stake sale. The Chinese insurance regulator is now expected to reject the final tranche of the transaction, accounting for nearly four-fifths of the deal, since funding is no longer in place.
The tale of how the deal began to fall apart gives rise to one big question: why was the news of Mr Xiao's reported behind-the-scenes role so fatal?
The answer suggested in local media reports is that CDB was concerned the structure of the deal may fall foul of Chinese insurance regulations. Rules published by the China Insurance Regulatory Commission in 2010 state that investors in Chinese insurance companies should fund acquisitions with their own money, not with bank financing or via third parties.
But that explanation is unlikely to be the full story, because the deal was initially structured in such a way that would have already required approval from the regulator. The loans from CDB constituted outside financing and CP would have struggled to rely on its own cash to acquire the Ping An stake.
CP has said its funding arrangements were legal.
For HSBC to announce the transaction in the first place, bankers believe it would have received strong assurances that regulators would approve the CDB funding.
"There must be a serious reason for the government to kill the deal. Someone is no longer comfortable and changed his mind," a Beijing-based financier says. HSBC declined to comment.
The two Chinese operators in the deal have impressive political pedigrees.
CDB is a "policy bank" with a mandate to lend in support of government initiatives, especially the development of infrastructure. Yet CDB increasingly functions as a profit-driven investment bank, having grown into that role under its governor, Chen Yuan. As the hard-driving "princeling" son of a revolutionary leader, Mr Chen wields great power in Beijing.
Meanwhile, Ping An is, on paper, controlled by private-sector shareholders. But The New York Times reported last year that the family of Premier Wen Jiabao had more than $2bn of wealth wrapped up in Ping An shares as of 2007. Ping An said the report contained "serious inaccuracies".
Whatever the truth about Mr Xiao, Caixin's report about his role created the impression that the transaction was far from straightforward -- that parties beyond CP and HSBC were involved and stood to benefit.
"From the start this deal was a real surprise. No one thought CP Group had the capacity to buy the whole stake. This looks like it was really a CDB deal," says a senior Hong Kong-based banker.
For HSBC, which has long prided itself on its knowledge of the Chinese market, it is a reminder of the murky, hard-to-quantify but very real political risks of doing business in China.