How China Resources Funded Baoneng’s Attempted Takeover of Vanke

A brief calm in the ongoing battle between Vanke founder Wang Shi and the company’s largest shareholder, Baoneng Group, was broken today when an independent member of the Chinese developer’s board confirmed that Baoneng’s Vanke share purchases had been funded by the company’s second-largest shareholder, China Resources.

Hua Sheng, a respected academic and an independent non-executive director of Vanke since 2011, confirmed media reports that Baoneng, a Shenzhen financial conglomerate which became the developer’s largest shareholder through aggressive share purchases late last year, had funded its stake with cash borrowed from China Resources, one of the mainland’s biggest state-owned firms.

The previously undisclosed arrangement between China Resources and Baoneng – which has been referred to by Wang Shi as “barbarians” – raises the spectre of a conspiracy to gain control of China’s largest homebuilder. Today’s news, which was detailed in an account by Bloomberg, also increases the likelihood that Chinese regulators, who have already been looking into the rare hostile takeover attempt, may step in to create their own resolution to the drawn-out contest.

Baoneng Pledged Shares for Loan From China Resources

Dr Hua Sheng, who currently serves as the President of Yanjing Overseas Chinese University in Beijing and earlier spent several years as a research fellow at the University of Cambridge in the UK, spoke out on his Weibo account today to confirm a report yesterday in the People’s Daily regarding China Resources funding Baoneng’s share acquisition.

Baoneng is said to have pledged 2.02 billion shares in its Jushenghua subsidiary to a division of China Resources in July last year as collateral on a loan from the state-run conglomerate, according to the People’s Daily report. China Resources, which like Baoneng and Vanke is based in Shenzhen, has denied any connection between the loan arrangement and the struggle for control of the real estate developer.

At a shareholder’s meeting last month, Wang Shi had suggested that any attempt to change the control of Vanke would be subject to review by the government. “The majority shareholder cannot do whatever it wants, for example suddenly proposing to remove all the directors and advisors — we still have regulators,” Wang said, as reported in the South China Morning Post.

In mid-June Baoneng filed a motion to remove chairman Wang Shi and nearly all of Vanke’s board, alleging that the entrepreneur had unduly collected salary from the company while studying in the US and the UK. That move was blocked when China Resources refused to support the wholesale change in control.

China Resources Keeps Quiet on Management Tussle

No explanation has been provided for why China Resources, which had been Vanke’s biggest shareholder before Baoneng began buying up shares, would want to finance a company attempting to take over its role in the developer.

When Vanke management attempted to acquire a portfolio of sites from a company belonging to the Shenzhen metro operator last month through a massive private offering of shares that would have made Shenzhen metro the new largest shareholder in the developer, China Resources objected to the move as unnecessarily diluting shareholders.

The Vanke-Shenzhen Metro deal would have diluted Baoneng’s then 24 percent holding down to 19 percent. The privately held company has since bought up more shares in Vanke, to bring its shareholding up to 25 percent, while China Resources now is the developer’s second-largest shareholder at 15 percent.

Borrowing Cash to Fund a Corporate Coup?

While China Resources opposed the en masse replacement of Vanke’s board, there has been ongoing pressure to replace Wang Shi as chairman, while keeping in place CEO Yu Liang. Wang has been outspoken in his opposition to Baoneng, and the nature of his relationship with China Resources chairman Fu Yuning is unclear. Fu came to the conglomerate from China Merchants Group in 2014, making him yet another high-ranking Shenzhen-based player in the drama.

Now that a seemingly neutral third-party has confirmed evidence of apparent behind the scenes collaboration between China Resources and Baoneng in the struggle for control of Vanke, pressure will be on the two companies to show regulators that they were acting together purely on a commercial basis, rather than having some ulterior agenda.