Disrupted Company of the Year 2017: Wanda's 40-Year Property Windfall Is Over — Policy Made It, Policy Broke It

Forty years of windfall, always one step ahead of everyone else. The reversal took a single year.

On the afternoon of July 19, 2017, hundreds of journalists gathered on the seventh floor of the Wanda Sofitel in Beijing, on Jianguo Road, where a 70-billion-yuan signing ceremony between Wanda and Sunac was due to start at 4 p.m. But the backdrop on the main stage carried a third name besides Wanda's and Sunac's: R&F Properties.

As 4 p.m. came, staff announced the ceremony would be pushed back an hour, and hurriedly swapped the backdrop for one reading "Wanda Commercial · Sunac China Cooperation Signing Ceremony," with "R&F" gone. A little later, Wang Jianlin and Sun Hongbin appeared together at the venue and went into a small meeting room with R&F Group chairman Li Sze Lim, who had arrived by then.

At 5:30 p.m. the ceremony finally began, and R&F's name was back on the backdrop. Sun Hongbin, Wang Jianlin and Li Sze Lim sat dead center, left to right.

In this hasty deal, which Wang Jianlin called a win-win-win, Wanda handed over 63.7 billion yuan worth of hotels and cultural-tourism projects, taken over by R&F and Sunac respectively. Wang said Wanda's cash reserves now topped 100 billion yuan and its debt had fallen sharply, putting it on the road to "asset-light brand management."

Wanda had been preaching "asset-light" for two years, and the assets sold to R&F went for 60% of their value. Pan Shiyi of SOHO China joked at a SOHO bidding event that he'd thought he misread the numbers. Less than two months after the deal closed, Sun Hongbin, while criticizing Jia Yueting for not selling assets decisively enough, said, "Look at old Wang."

At the start of 2017, Wanda still looked fine: Wang Jianlin was once again the richest man in Greater China on the Hurun Rich List, the company kept investing overseas, its flagship Wanda Commercial was queuing for an A-share listing, and Wang was taking direct aim at Disneyland.

Then, in six months, Wanda first cut the registered capital of 84 Wanda Plazas from several hundred million yuan each to a uniform 50 million yuan, pulling back about 40 billion yuan in all. Next came the sell-off of its stocks and bonds by state-owned banks, which wiped out 4 billion yuan in a single day, and a search for a buyer for an Australian property project worth 2 billion Australian dollars. By the 3rd of this month, all three of the world's big rating agencies had cut Wanda to "junk."

In under a year, the property empire that had made Wang Jianlin China's richest man for four years running was disrupted.

The Property Windfall Lasted 40 Years, and Wang Jianlin Always Moved a Step Ahead of Policy

In the late 1980s, China's economic reforms shifted their focus from the countryside to the cities. The state adjusted the criteria for setting up municipalities and counties, and population controls began to loosen. Urban areas spread fast and their populations multiplied, leaving roads, housing and the pipes and wires beneath them badly in need of renewal.

After incentives arrived to encourage home buying, raise rents and provide mortgages, the average urban resident's floor space had tripled by 1990, reaching 17.8 square meters. China had suddenly produced a new market of more than a billion people. Until then, housing everywhere had been planned and designed to a single standard and handed out free by work units. This is where a property windfall that would run for more than 30 years began.

Like many people who got rich in that era, Wang Jianlin was standing in the right place when the property windfall arrived. He left the army in 1987 and was assigned a civilian job as director of the general office of the Xigang District government in Dalian, later moving to the district's development company, Xigang Housing. There he got his first project: redeveloping the old Beijing Street neighborhood in Dalian. Building it cost 1,200 yuan per square meter, while the most expensive housing in Dalian at the time sold for 1,100. The state firms that held development quotas saw no profit in it and refused, so the government gave it to Wang, who had come asking for it.

To make money, Wang had to find a way to sell at 1,500 yuan per square meter. He and his colleagues turned the windowless living rooms then standard in Dalian's new apartments into rooms with windows, gave every unit its own bathroom, and fitted aluminum-alloy windows and steel security doors. The design changes at Beijing Street matched what people were beginning to want from a home.

Wang says the complex's 1,000-plus units sold out in two months at an average of 1,600 yuan — a record price for Dalian — earning Xigang Housing nearly 10 million yuan. Having turned a loss-making company profitable, Wang was made its general manager in 1989. Xigang Housing was later restructured into Dalian Wanda.

Dalian Wanda's business soon moved beyond Dalian. In 1993 Wang Jianlin went to Guangdong to expand. National policy at the time barred companies from registering in other provinces. In his own account, given years later in a speech at Harvard, he found a Guangdong property company: "We paid it 2 million yuan a year, it registered a branch for us, and that was that."

The economist Wu Jinglian has written that rent-seeking in the early 1990s centered on the rent attached to power: "Everyone knew power had a price, and that it expired if unused."

Doing business in that era, and dealing with the government, involved rent-seeking to one degree or another. Wang Jianlin has never dodged the point. In a 2012 interview with Forbes, he said: "There was no system of land-use rights back then. A leader signed a note, and the land was yours."

Signing those notes brought officials money, and something they valued more: a record of achievement.

China had begun its tax-sharing reform, which counted land-transfer fees as local revenue and put every right over land in local hands. As the commercial housing market opened and places became better to invest and live in, finished buildings gained value, which pushed up the price of the undeveloped land around them. Local governments ran this land-based fiscal system, and the more revenue an official brought in, the better his odds of promotion.

Wang Jianlin also worked out how to cooperate with the government and do what it wanted done. By donating kindergartens, gymnasiums and universities and subsidizing apartments for teachers, Wanda built warm relations with city governments and, in return, got better plots to develop. Former Wanda vice president Yin Hai has said that government ties counted for something in Wanda's early years.

Even the football club Wanda sponsored could get land for a training base in a prime part of the city. Sun Jihai, who played for Dalian Wanda, wrote in his autobiography: "The city government stepped in, and after some negotiation a plot big enough for four pitches was allocated in the Dalian Economic and Technological Development Zone as our training base. You have to understand that back then the development zone was the land everyone fought over — every inch was worth its weight in gold."

Unlike the tens of thousands of others who got rich in the early 1990s, Wang Jianlin kept moving a step ahead of policy.

Wanda's first batch of housing in Dalian let anyone willing to pay live at a standard previously reserved for bureau-level cadres — and did it before policy said they could.

Its all-in bet on residential housing came before policy, too. In 1996, Premier Zhu Rongji told an executive meeting of the State Council that housing construction should become a new engine of growth and a new focus of consumption. A year later, "actively cultivating new growth points" went into the report of the Communist Party's 15th National Congress. By then Wanda's annual residential sales already made up nearly a quarter of Dalian's.

In 2000, the Dalian city government issued a document telling the city's construction system to learn from Wanda. By then Wanda was already preparing to move from housing into commercial real estate. It had spotted a bigger opportunity.

Building New City Centers Fast With Wanda Plazas, Wanda Gave Local Governments What They Wanted

By 2000, China's urban population was approaching 460 million, and the urbanization rate had climbed from under 30% to 36%.

But Wang Jianlin believed that once urbanization was done, demand for housing would fall. He called it a feature of the business: "A residential district develops, and at the end it's empty — a few thousand people left, and nothing there."

He also thought residential projects produced unsteady cash flow: money came in while the units sold, and once they were gone the company had to buy land, design and build all over again while the cash stopped. After a three-day internal meeting, Wanda decided to go into commercial real estate — that is, to build Wanda Plazas, leasing out most of the shop space to keep cash coming in.

This logic, obvious today, was unpopular then. That year Wangfujing Department Store stopped developing commercial property after its Chengdu project failed, going back to its old leasing model. Vanke sold off its department-store stakes and made itself a specialist residential developer.

Wanda veterans interviewed by Southern Weekly in 2014 recalled what they had thought at the time: "Jump straight into commercial real estate — and who designs it? We didn't understand the construction and we didn't understand signing up tenants. It meant rebuilding our whole production process from scratch." Wanda had run a few rental properties before that — seven or eight small malls and restaurants — but nothing at scale.

Changchun Wanda Plaza, opened in 2002, was the first project after the turn, sited in the busiest part of downtown. Wanda was known then mainly for its football club, a title sponsor and repeat champion. Worried that a commercial property with no name recognition could not attract investors or tenants, Wang Jianlin spent six months and more than a dozen rounds of persuasion to get Walmart onto the plaza's second and third floors.

On the strength of that long Walmart lease, Wanda signed Gome and Suning as well, and developed new plazas in Shenyang, Changsha and elsewhere.

Wanda's process was to sign joint-development agreements with its retail partners before breaking ground. The tenants specified what they needed from the building; once both sides agreed, they paid rent. Setting the commercial plan, the overall positioning and the product positioning according to tenants' requirements, and only then completing the development, became known as "order-based commercial real estate."

The money was made by keeping the second, third and fourth floors, offering low rents and long leases to draw big anchor tenants and produce steady cash flow, while the ground-floor shops were carved up and sold. Wanda did not copy the mature overseas model of leasing an entire property because China had no commercial mortgage loans at the time: a loan on a commercial project had to be repaid within three years.

Tenants were not the only ones Wanda was accommodating. Next to the low, scattered old buildings in the downtown shopping districts of Changchun and Shenyang, the new Wanda properties were what local governments pinned their hopes on to rebuild a city center.

"Wanda only deals with officials who have political ambition. Where a local government hums and haws, I simply won't go — plenty of others are inviting me, so why argue with you," Wang Jianlin said.

Around 2005, commercial banks started accepting commercial property as collateral. Wang Jianlin launched a new generation of Wanda Plaza, billed as an urban complex, with hotels, offices, live-work apartments, homes and retail; all the ground-floor shops were now leased, though the development rhythm of order-based commercial real estate stayed the same.

Besides remaking old city centers, Wanda also helped "officials with political ambition" build new ones, using commercial property to lift business in a new district and the price of the housing around it.

The complexes later built by China Resources, CapitaLand and COFCO all show traces of the order-based model, but none of them could scale up as fast as Wanda. Wanda could break ground on several projects at once and open them in 18 to 22 months. Other developers usually needed more than 20 months just to build.

The main reason for so large a gap was that Wanda Plazas, designed in-house by Wanda's own planning institute, could be copied quickly: plazas across the country had nearly identical tenant lineups and layouts. Its strategic partners included Uniqlo, KFC, McDonald's, Starbucks, Carrefour, Walmart and China Resources — brands that got rent-free terms, opened stores wherever Wanda went, and brought Wanda the crowds.

"From buying the land to development, we can open a Wanda Plaza in eighteen months. For a local government on a five-year term and in a hurry to show results, nothing could be more welcome than the Wanda model," Wang Jianlin later put it.

Meeting local officials' needs made buying land a good deal easier.

During the 2009 Two Sessions, Ningxia's leaders went to Wanda's headquarters in person to invite the company to build a plaza in Yinchuan. In April 2010, the city of Langfang in Hebei blew up its municipal party committee and government office buildings to clear the land for Wanda.

Good government relations let Wanda do something rare — break ground the day it got the land — which shortened the build further. From 2011 on, the number of new Wanda Plazas each year rose from 17 to 50 in 2016. The average plaza took 22 months from land purchase to opening, the fastest 18 months, with several projects breaking ground and opening at the same time.

Beyond easy approvals, the bigger favor was cheap land. For its cultural-tourism city in Xishuangbanna, the local government tore out 5.3 square kilometers of rubber trees, pineapple fields and processing plants and left the land to Wanda to build an "international leisure resort." In 2012, land there that normally went for more than 500,000 yuan per mu averaged around 200,000 yuan per mu when Wanda bought it.

Wanda Commercial's IPO prospectus disclosed that from 2011 to 2013 its average land cost was 1,821, 1,171 and 1,096 yuan per square meter. Part of the reason may be that Wanda was buying in third- and fourth-tier cities, but with Chinese land prices rising almost without pause, a land cost that fell year after year was still unusual.

It was not only the land that came easily. So did the money. Banks everywhere held quotas of "policy bank lending," set aside for projects closely tied to building the city.

In 2013, Wang Jianlin became China's richest man for the first time. Wanda had 82 plazas in China by then, spread over 55 cities.

Around the same time, more than one foreign news organization investigating Wanda found murky shareholding ties to relatives of senior officials, and that the company at times served as their front. Wang Jianlin, in his later Harvard speech, did not dodge that either.

As the Windfall Wound Down, Wanda Turned Overseas

The Wanda Plaza in western Jiangyin opened in 2012, 15 kilometers from the old town. It held a Wanda Department Store, a China Resources supermarket, a Da Gexing KTV, and anchor tenants including Uniqlo, McDonald's and Starbucks. The western district was also a secondary center in the Jiangyin government's plans, with roads being widened and new housing, hospitals and schools going up.

Zhang Chao, who bought two live-work apartments there as an investment, remembers the plaza being "packed" only right after it opened: every restaurant inside had a line, and cars coming from the city's core on the east side queued at the entrance of the underground garage.

Then the crowds thinned fast. The China Resources supermarket on the first and second basement levels closed in 2014, and the supermarket that replaced it did not last a year. The street-facing shops Wanda called "Golden Street" found no tenants, so Wanda offered six months' free rent to anyone who moved in. Many of them moved out the day the free rent ended, because nobody came.

Without foot traffic, Jiangyin's new city center never happened. Zhang Chao's two investment apartments are still worth 1,000 yuan per square meter less than he paid, and Wanda's arrival changed nothing.

Jiangyin, one of China's "top 100 counties," was not the only place where a Wanda Plaza failed to produce a new city center. With department stores in decline nationwide, big supermarkets doing badly and Walmart handing its China business to JD.com, Wanda Plazas ran into trouble in first- and second-tier cities too.

In 2015, the outdoor shopping streets at the Baoshan and Wujiaochang Wanda Plazas in Shanghai struggled to find tenants and left many units empty. In the third quarter of 2017, Qingdao Gangwan Wanda Plaza — neighborhood retail attached to a Wanda housing project — opened less than 50% leased; the city's good commercial space had been running at 90%.

As a commercial property windfall of more than a decade faded, Wanda had already started to turn overseas.

In May 2012, Wanda announced it was paying US$2.6 billion for AMC, the second-largest cinema chain in the United States. In a Forbes interview that year, Wang Jianlin said he had met the heads of North America's six big studios, the Academy Awards organizing committee and leaders of the Motion Picture Association of America to talk about joining the Chinese and American entertainment industries.

He brought Hollywood stars including Leonardo DiCaprio, Nicole Kidman and Tom Cruise to Qingdao for the launch of a 50-billion-yuan cultural-tourism project.

In 2012, thirteen government bodies including the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs and the China Banking Regulatory Commission (CBRC) jointly issued a directive on "encouraging and guiding private enterprises to actively pursue overseas investment," calling on Chinese companies to put money abroad.

In his 2015 Harvard speech, Wang Jianlin described a Wanda "2211" plan, in which the last two 1's stood for annual revenue above US$100 billion and net profit above US$10 billion. At least 30% of that US$100 billion was to come from outside China.

Wanda was not the only one riding the wave. According to JLL, Chinese real estate investment in overseas markets hit a record US$16.5 billion in 2014, 46% more than in 2013.

Across 2016, Chinese companies completed US$187 billion of overseas investments and acquisitions, four times the 2012 figure. Private firms including Wanda, Anbang, HNA and Fosun were among the biggest buyers.

As the deals abroad grew, Wang Jianlin stepped onto the world stage himself. Before 2012, The New York Times had mentioned him in exactly one story — an article on China's property tax that quoted him. Over the next five years the counts ran 10, 11, 11, 8 and 37. By 2017 that was one or two stories a week.

Wang Jianlin had become impossible to overlook. From 2013 he bought property in Madrid, London and New York, a yacht company and a football club. In three years Wanda's overseas investments passed US$15 billion.

The Hollywood Reporter, Forbes, Fortune and Reuters all ran interviews with him. The Economist, in a piece headlined "It's a Wanda-ful Life," called him a man with Napoleonic ambition. The article was posted on Wanda's own website.

Before It Finished Buying Hollywood, Policy Disrupted Wanda

For the capital markets, Wanda's turn came on June 22, 2017. That day several Wanda bonds listed in Shanghai fell 2% and Wanda Film's shares came close to limit-down. Word went around that China Construction Bank, Shanghai Pudong Development Bank, ICBC Asset Management and other institutions had told their fund managers to clear out bonds tied to Dalian Wanda, and that Wang Jianlin had been barred from leaving the country.

Wanda and China Construction Bank both called it a rumor, but the moves by state-owned banks were read as a clear signal, and after that there was essentially no good news about Wanda.

A widely shared article from late 2017 described the turn as punishment for outbidding a central state-owned enterprise on an overseas investment: Wang had won the development contract for a 60% stake in Kuala Lumpur's landmark Bandar Malaysia by offering twice what China Railway Construction Corporation did.

Where the turn really started is hard to verify — such decisions are made inside a black box — and HNA, Fosun and Anbang, whose overseas investments hit the same wall at the same time, came with no similar gossip about beating a state firm to a deal.

Whatever set it off, the government fixed on Wanda's overseas investment and restricted it.

That was fatal to Wanda's expansion plans, because investing in foreign companies on that scale depended on borrowing on that scale.

According to Reuters, Wanda raised US$3.1 billion in loans in 2012 to buy AMC. Several Chinese banks committed financing at the time — Bank of Beijing, BOC International, the Export-Import Bank of China and ICBC all agreed to support the deal. The money Wanda used to buy AMC was, in effect, all borrowed.

Similar arrangements included a US$280 million refinancing loan for the 2014 purchase of the triathlon company World Triathlon Corp; a US$500 million loan for overseas property projects; an US$800 million club loan for two resort projects in China; and a US$600 million secured loan for a Chicago skyscraper. The borrowing clustered in the third quarter of 2016.

The sudden regulatory attention cut a crucial link in Wanda's financing. That is exactly why the three agencies downgraded it: a credit rating is an agency's expectation of whether a company can pay its debts. Wanda had borrowed tens of billions of dollars to buy assets abroad, and now its money could not leave China, so the risk of default looked high.

Several Wanda deals fell apart after Chinese regulators failed to approve them, among them its late-2016 bid for Dick Clark Productions (DCP), which produces the Golden Globes. DCP said in a statement that the deal collapsed because Wanda could not get the money out of China in time.

Wang Jianlin said the acquisition was dropped because policy had changed on both sides. "Relevant policies in both countries changed. In the U.S. some people objected to our acquisition, and on the Chinese side some relevant policies changed as well," he told the Financial Times.

In January 2017, China's foreign exchange reserves fell to US$2.99 trillion, below US$3 trillion for the first time in 70 months. With the trend running that way, Chinese regulators kept tightening the rules on foreign exchange:

Official controls on money leaving the country

November 27, 2016

The State Administration of Foreign Exchange (SAFE) required prior approval for transactions by domestic companies worth US$5 million or more.

November 28, 2016

SAFE said six kinds of outbound investment by domestic companies could be banned.

November 29, 2016

The central bank required that domestic companies not use domestic funds to finance overseas entities.

December 2, 2016

The Ministry of Commerce required stricter review of the paperwork filed for new outbound investments.

December 5, 2016

The NDRC required a new reporting format for outbound investment information, to tighten checks on whether deals were genuine.

June 7, 2017

The CBRC ordered the large state-owned commercial banks to examine overseas credit lines and risk exposure at several companies, Wanda, Anbang and HNA Group among them.

July 18, 2017

The NDRC said it would keep watching irrational outbound investment in real estate, hotels and sports clubs to guard against overseas investment risk, and "advises the companies concerned to decide prudently."

Wanda was not the only one caught. In November 2016, a US$350 million deal for the Chinese metals producer Anhui Xinke to buy a Hollywood production company was terminated. A US$1 billion partnership that Paramount Pictures reached in January 2017 with Shanghai Film Group and Huahua Media never received the money promised from the Chinese side.

Wanda, though, was the one regulators named. In June 2017 the CBRC ordered a review of credit risk covering the star dealmakers abroad — Wanda, Anbang, HNA and Fosun — which between them had at one point accounted for a fifth of the value of China's outbound deals. The CBRC then put six Wanda overseas projects, each worth billions of dollars, under supervision; the instruction circulated online.

The Wall Street Journal, which read the document, reported that the measures included: companies Wanda bought abroad could not raise financing from Chinese financial institutions; Wanda could not pledge those companies as collateral to borrow from financial institutions; and acquired companies could not be folded into Wanda's China-listed entity. If any completed acquisition needed more money, it could not get a loan from a Chinese bank.

Its debt troubles reached even AMC, the American company it had bought six years earlier. AMC's shares fell in July 2017 and drew questions from analysts and investors, until the company put out a statement saying Wanda was not the source of the money used to acquire it and that none of the funding had come from mainland Chinese banks.

Fitch cut Wanda to junk on the 3rd of this month, saying that if the banks in Wanda's overseas syndicated loans demanded early repayment and Wanda could not meet those demands at once, or if it could not raise enough liquidity offshore, its liquidity position could come under enormous pressure. In March 2018, Wanda has a US$510 million loan to repay.

Wanda's money problems were not confined to its overseas deals. At the end of 2016, the bank credit lines available to it in China had shrunk by 53.4 billion yuan from 2015.

Property companies like Wanda have always been the model of running on debt. They borrow heavily to build, mortgage the finished buildings to borrow again and build more, and grow the numbers on the balance sheet round after round. As of June 2017, Wanda's total domestic bank credit lines came to 362.9 billion yuan, of which it had drawn 132.4 billion. It had mortgaged 330 billion yuan of property — 80% of the value of all its investment properties — to borrow from banks, trust companies and brokerages.

The trouble started the moment the banks stopped wanting to lend.

Wanda's run of quick asset sales can be read as an effort to ease that debt pressure. In October 2017, a downgrade forced it to repay a US$1.3 billion loan early.

At the 2015 Harvard speech, someone asked Wang Jianlin to answer the charge that Wanda's overseas investment was really about moving assets out of China. Wang said overseas investment does indeed result in "asset transfer," but that "there's no right or wrong about transferring assets or investing abroad — only legal and illegal."

"A company's freedom to invest, or capital's freedom to move, is itself a basic measure of a country's rule of law. If companies have no right to invest freely, there's no freedom or fairness in that society either," he added.

In 2017, responding to the capital controls, Wang Jianlin said: "We could perfectly well raise the money ourselves offshore and be done with it. We just don't want to be a company that breaks the rules."

Graphics/Feng Xiuxia, Gong Fangyi

Cover image/E-House, NetEase Real Estate