Chinese Companies Struggling with Their Shady Reverse-Merger Business

On Jan. 14, 2022, the French fashion company SMCP Group held a general meeting of shareholders and voted to dissolve the five-member board of directors, kicking Qiu Yafu, chairman of the board of directors of China’s Shandong Ruyi Technology Group Co., and his daughter Qiu Chenran, off the board, and shattering Qiu Yafu’s dream of establishing a Chinese version of Louis Vuitton.

Qiu Yafu tried to prevent this from happening. On Oct. 28, 2021, when bond trustee Global Loan Agency Services Ltd. (GLAS) initiated the first SMCP Group shareholders’ meeting request, it was rejected by the board headed by Qiu.

On Nov. 30, 2021, GLAS applied for an executive order at the Paris Commercial Court in France on the grounds that Shandong Ruyi had “illegally transferred” the remaining SMCP shares held by Shandong Ruyi, and obtained approval to convene a general meeting of shareholders to vote on the dissolution of the board of directors. Ruyi Group tried to oppose it but was rejected by the Commercial Court of Paris, France.

In 2016, Shandong Ruyi acquired a majority stake in SMCP Group for €1.3 billion, with a shareholding ratio of up to 53 percent. However, in September 2021, Ruyi Group defaulted on its €250 million debt offered by way of equity pledge, resulting in the transfer of SMCP Group’s debt to GLAS.

As recently as 2018, Qiu ambitiously told the U.S. media that Shandong Ruyi would build a “Chinese version of LVMH” (Louis Vitton) through acquisitions. In February of that year, he announced that he would spend €600 million to acquire a 70 percent stake in the Swiss luxury brand Bally.

However, as of December 2021, the market value of Ruyi Group had fallen to one billion yuan (about $200 million), the company owed tens of billions of dollars, and has been designated a “defaulter” many times.

Davy Jun Huang, an economist who now lives in the United States, told The Epoch Times: “After 2012 and 2013, there was so-called overseas fever. Some Chinese businesspeople or enterprises began to go overseas one after another to acquire certain brand names. Some were buying luxury brands, and some were buying properties, airport hotels, etc.”

Huang is the Chief Economist of the China Enterprise Capital Alliance (CECU) and a Trustee and Executive Director of the Research Committee of the Asian Real Estate Association (ASEA).

Raising Capital

Fueling this wave of overseas acquisitions was the so-called “rise of great powers.” Huang said that between 2012 and 2015, the Chinese Communist Party (CCP) promoted high-profile propaganda about “the rise of great powers,” advocating “the Chinese model goes global” and encouraging enterprises to “go overseas.”

So, where do Chinese companies get so much capital for the acquisitions?

Their strategy is to buy shares of overseas brands at low prices, and either issue secondary bonds as collateral to obtain cash flow or repackage them and list them through capital operations and use the money raised for the next round of acquisitions.

For example, Ruyi sent the three acquired companies, Libang, Japan’s Rena, and France’s SMCP, to the capital market.

Another example is Ruyi staging a drastic reverse merger (a smaller, private company acquires a larger, publicly listed company) relying on short-term borrowing of 2 billion yuan ($316 million) from banks and issuing 2.5 billion yuan ($395 million) in corporate bonds and using Ruyi Group, with net assets of only 2.6 billion yuan ($411 million), to buy the LYCRA  Company with a valuation of 17.9 billion yuan ($2.827 billion).

Changing Fortunes

But balloons always pop. In March 2020, more than two years after Shandong Ruyi announced the acquisition of Swiss luxury brand Bally, its promised €600 million financings were still pending, and payment for a transaction with Israeli menswear manufacturer Bagir was delayed. In April 2020, Bagir filed for bankruptcy after running out of cash.

In May 2020, Japan’s Rena announced its bankruptcy and delisting. In April 2021, Libang shares were suspended.

On July 3, 2020, due to the non-payment of debts owed by Shandong Ruyi Technology Group, the Wanzhou District Court of Chongqing municipality issued a consumption restriction order against Qiu Chenran, the actual controller of the group, whereby she was not allowed to carry out high consumption behaviors or consumption that was not necessary for life and work, including taking the G-head high-speed railway. Such rulings are imposed to compel debtors to maintain funds so they can pay back loans.

In September 2021, Gieves & Hawkes, a 250-year-old British luxury menswear brand owned by Ruyi Group, faced bankruptcy liquidation.

On Nov. 16, 2021, Ruyi Group was listed as a defaulter by the Taiyuan Intermediate Court, with an enforcement target of 85.996 million yuan ($13.57 million). On Oct. 28, Ruyi Group released a third-quarter performance announcement showing that from January to September of 2021, there was a net loss of 43.3 million yuan ($6.83 million).

Between 2016 and 2018, “closed-loop” became the mantra of some Chinese entrepreneurs. Huang said they felt good about themselves at the time, feeling that China was the main consumer of many brands. They wanted to take control of upper level brands and make money from the Chinese consumers, while also making some money from foreign consumers.

However, “Their business philosophy, management ability, strategic deployment, personal standards, and management level are not up to the requirements. They just rely on constantly increasing financial leverage, constant storytelling, and constantly fooling investors. They also underestimate the time and energy required to run the brand, as well as all aspects of the level of operation [requirements], and the funds,” Huang said.

‘Going Overseas’

Ruyi Group is just one of many Chinese companies that were keen to “go overseas” but ultimately landed in defeat.

In 2012, Wanda Group spent $2.6 billion to acquire AMC, the world’s largest cinema chain and then successively acquired Starplex Cinemas, Carmike, Oudian Cinema Line, and other large cinema giants, which expanded the scope of AMC’s operations to 15 countries.

In 2014, Ampang Insurance bought the Waldorf Astoria, a famous landmark in New York, and acquired Belgian banks, insurance companies, South Korea’s Toyo Life, Allianz Insurance, and the Dutch insurance company VIVAT.

In 2016, HNA bought a 25 percent stake in Hilton Hotels Group, increasing its stake in Deutsche Bank to nearly ten percent. From 2015 to 2017, HNA Group’s overseas mergers and acquisitions amounted to $50 billion.

However, at the end of 2016, the situation changed abruptly. China’s foreign exchange reserves plummeted, falling below the $3 trillion mark, and Beijing demanded that the floor limit of $3 trillion in foreign exchange reserves be enforced, making it difficult to send funds out of China.

Huang said another reason Chinese companies have been struggling with overseas mergers and acquisitions is that the CCP has cracked down on capital flight. “Since the Chinese economic crisis in 2015, it has been found that China’s foreign exchange reserves are getting smaller and smaller…and a lot of capital fled.”

Government Intervention

In June 2017, the China Banking and Insurance Regulatory Commission (CBIRC) asked major banks to begin investigating the risk level of overseas mergers and acquisitions by several companies, including HNA, Wanda Group, Anbang Insurance Group, Fosun International, and Zhejiang Rosenelli. The CCP regulatory authorities sent a message that they no longer support the “irrational” investment of Chinese enterprises overseas, criticizing Chinese enterprises for taking advantage of the opportunity to transfer assets, consume the country’s foreign exchange reserves, trigger panic in capital outflows, and accelerate the expectation of RMB depreciation.

In such a political environment, Wu Xiaohui, founder of Anbang, was arrested in 2017. In February 2018, Anbang was taken over by the regime and renamed Dajia Insurance Group. In September 2020, Anbang Group and Anbang Property & Casualty Insurance announced their dissolution and liquidation.

On Jan. 29, 2021, HNA Group issued a statement saying that because they could not pay off their debts on time, the relevant creditors applied to the court for a bankruptcy reorganization of HNA Group. The Chinese conglomerate eventually confirmed its debt of 1.1 trillion yuan ($173.8 billion).

On May 23, 2021, Wanda Group announced a complete withdrawal from the board of directors of AMC Corporation in the United States.

Are overseas mergers and acquisitions just a technique used by China’s richest people to secretly transfer capital abroad?

Huang said: “In fact, there are deep secrets and complicated risks in the overseas mergers and acquisitions itself, such as, should the price be this high? If one buys an airline, as in the case of China’s HNA Group, that airline may cost $2 billion, while HNA probably paid about $1 billion. Where did all that money in the middle go? They put some of those assets into a private fund called ‘cihang.’”

In July 2017, The New York Times revealed that a Chinese person named Guan Jun had transferred more than 29 percent of China’s HNA group stake ($18 billion) to the New York-based Hainan Cihang Charity Foundation, almost equal to the sum of all U.S. companies’ contributions in 2016. No one knows how this young person in their 30s holds such a large stake in a private company.


Jenny Li has contributed to The Epoch Times since 2010. She has reported on Chinese politics, economics, human rights issues, and U.S.-China relations. She has extensively interviewed Chinese scholars, economists, lawyers, and rights activists in China and overseas.

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