SMITHTON, Australia – Soon after Chinese leader Xi Jinping visited the remote island state of Tasmania, a little-known Chinese entrepreneur with big ambitions followed in his footsteps, buying Australia’s largest dairy, with 20,000 cows and rolling green pastures, for more than $ 200 million.
It looked like a good game. Australia was hungry for Chinese money. And businessman Lu Xianfeng presented himself as a wealthy investor, promising to protect existing jobs and create more.
Like much of the most spectacular overseas spending of Chinese conglomerates, the acquisition of the dairy was funded by layers of debt, the kind of financial complexity and opaque deal that worry regulators in China and elsewhere. the world.
Mr. Lu paid for the purchase with three loans, one from an Australian lender and two from Chinese lenders, including the largest state-owned bank, Industrial and Commercial Bank of China, according to his listed company documents. in stock exchange. He then pledged shares in public company Ningbo Xianfeng New Materials, to raise even more money. Lately, its companies have found themselves in a precarious financial situation, with Ningbo Xianfeng having suspended trading of its shares in China, citing restructuring.
The deal is part of a problematic scheme as indebted Chinese companies buy renowned assets in the United States, Europe, Canada and Australia. China was Australia’s largest source of foreign investment in 2016, as measured by approved agreements.
China has started to curb big players like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda, fearing that their piles of debt, largely from state banks, could threaten the financial system and Economic Growth. Foreign governments are also wary of the flow of Chinese transactions, with complex ownership structures that make it difficult to discern the strategic motives and financial health of buyers.
While Australian politicians generally view Chinese investments as beneficial, there are growing concerns that the government will endorse deals from problematic companies aligned with a potential adversary. Attitudes towards Chinese money have been complicated by recent controversies over donations from Australians of Chinese descent linked to election campaigns and linked to the Chinese government.
The acquisition of the Tasmanian dairy, known as Van Diemen’s Land Company, or VDL, raises questions about whether the Australian government is fully assessing the risks.
Large purchases by foreign buyers are monitored by the Australian Foreign Investment Review Board. Although the board of directors analyzes transactions for threats to the country’s national interests, its mandate does not require in-depth due diligence on buyers’ finances.
“The Australian assumption has been that Chinese companies operate like Australian companies,” said Peter Jennings, executive director of the Australian Strategic Policy Institute. “But they operate in a way that is not the way we do business in the Australian economy.”
The review process, he said, appears to lack basic due diligence on potential foreign buyers. “If they have the ability, they are very good at hiding it,” he said.
Mr. Lu is not the only Chinese buyer with precarious finances.
A Chinese company, Landbridge, which leased the strategic port of Darwin in 2015, is facing financial difficulties. Landbridge is trying to secure loans from lenders, including the China Export and Import Bank, raising concerns as to why a facility near the Australian and U.S. Defense Forces could be linked to a Chinese state-run lender dedicated to achieving Beijing’s political goals.
In a sign of growing sensitivity, the Australian government has rejected two offers by Chinese companies to buy the country’s largest cattle ranch, S. Kidman and Co., on the grounds that the deal was against the country’s interests. A year later, a Chinese buyer took a minority stake with an Australian businesswoman, Gina Rinehart.
Mr. Lu did not respond to requests for comment from his Chinese and Australian companies. A spokeswoman for her Chinese company, Ningbo Xianfeng, declined to comment.
A spokesperson for Australian Treasurer Scott Morrison said in a statement that “the government takes into account a wide range of factors contrary to the national interest when evaluating foreign investment proposals”, including financing agreements and the impact on the economy.
Chinese money has poured into Australia, where buyers are looking for great outdoors, fresh produce and a stable economy. In the past decade, Australia has been the second-largest recipient of Chinese money, just behind the United States, according to a study by accounting firm KPMG.
Chinese players fought over cattle ranches, wineries, ports, and mines. Tens of thousands of homes have been foreclosed.
The Tasmanian government has been wooing Chinese investors since welcoming President Xi with fanfare in 2014. Backed by a free trade agreement between Australia and China, exports of fresh produce from Tasmania to China have increased. soared.
From the start, the agreement for the lush lands perched above the South Pacific Ocean attracted attention. The roots of VDL, Australia’s most prestigious dairy, date back to the colonization of Tasmania by the British in the early 1800s. The British owned it for over a century; the dairy was owned by a New Zealand company before Mr. Lu bought it.
Mr. Lu, whose main business in China is manufacturing blinds, set up an Australian company, Moon Lake Investments, to purchase the dairy. He pledged to invest an additional A $ 100 million, preserve the 140 existing jobs and add 95 more. He pledged to export farm-fresh milk to a growing Chinese middle class desperate for quality assurances and hungry for imported food.
“Here is a proposal from a savvy Chinese investor,” said VDL Farms managing director Evan Rolley, a former state government official. “He could bring the Tasmanian product directly to the consumer markets in China. “
To help gain acceptance in the tight-knit Tasmania, where the population is only 500,000, Mr. Lu has chosen a well-connected former politician, David Crean, as vice president of Moon Lake. Mr. Lu impressed authorities with his promise to honor the cultural heritage of indigenous peoples on the property, Rolley said.
“They have a naive fixation” with China, Mark Harrison, associate professor of Chinese studies at the University of Tasmania, said of the state government.
“Sir. Lu’s financial problems have been well covered in the Chinese press and in financial documents,” he said. “I know them. Why doesn’t the government do it?”
After reaching an agreement to buy the dairy in late 2015, Mr. Lu set up Kaixin Investment, a Ningbo-based company, to acquire the assets. This company obtained loans of $ 74 million from the Industrial and Commercial Bank of China and $ 22 million from the China Zheshang Bank to finance the purchase.
The loans were guaranteed by Ningbo Xianfeng, who in turn was backed by all of the dairy farm’s assets, according to company documents. Separate public documents showed that a $ 56 million loan from Rabobank in Australia also funded the deal, debt that was also backed by dairy assets.
The Chinese loans were not presented to the review committee, according to Moon Lake general manager Sean Shwe, who helped prepare documents for the committee. Mr. Shwe said he was not aware of the loans from Chinese lenders.
Around the same time, Mr. Lu began to organize other fundraising in China. He handed over blocks of Ningbo Xianfeng shares to lenders as collateral for loans, ultimately pledging 95% of his shares, according to documents filed by the company.
These loans are generally given at high interest rates. They can tumble quickly if the value of stocks drops, a possibility in the checkered Chinese stock market.
In an interview, a spokesperson for Mr Morrison, the Australian Treasurer, said Mr Morrison was “comfortable with the advice provided by the review committee on the acquisition of dairy products”.
The Australian review committee said the documents presented by the Chinese buyer were confidential.
Rabobank declined to comment.
After the purchase closed in March 2016, Mr. Lu attempted to sell the dairy to his publicly traded company under a deal that would have paid off Chinese loans. But the China Securities Regulatory Commission banned the transaction, citing the dairy’s “uncertain” future profits, a move based on declining income caused by falling global milk prices.
Mr. Lu’s businesses are in trouble. Ningbo Xianfeng has not traded since April. He announced in July that profits are expected to fall by at least 70% in the first six months of 2017.
The blinds business Mr. Lu owns in Perth, Australia has not generated annual profits since Ningbo Xianfeng acquired it in 2014.
Last month, Ningbo Xianfeng announced that it would sell an online auto parts business in Shanghai. The employees had staged a revolt, claiming that Mr. Lu had broken his promises, according to news reports and public documents.