Over the great wall

China’s markets are shaking off their casino reputation

Can foreign firms actually win?


In a world where internet memes can explain market swings, China is second to none. 

Early in March, with mainland equities down by 15% in two weeks—their steepest fall in years—a video circulated on Weibo, a microblogging site, of a sheep stuck in a fence on a hill and a hiker climbing up to free it. 

The description of the video, in its meme incarnation, was “the national team comes to rescue me”. 

The national team is shorthand for big state firms that are believed to stabilise the market by buying shares when they plunge.

This video, though, had a twist. 

The hiker frees the sheep, only for it to lose its footing and tumble down the hill. 

Talk of the national team’s rescue mission had spread for a few days, but equities continued to tumble, wiping out all gains made since late last year.

At last, on March 9th, the national team really did arrive. 

State media reported that large state-owned insurers had bought stocks. 

Coincidentally or not, that heralded the market bottom. 

For casual observers of Chinese finance it all fit a familiar pattern: stocks careening from boom to bust, propelled by day traders and rumours, and the government eventually restoring calm.



But to those inside the market, the story was in fact more novel. 

The decline in Chinese shares neatly paralleled the decline in the nasdaq, America’s tech-heavy stock index. 

Guan Qingyou, a prominent Chinese economist, argued that the underlying trigger was nervousness about inflation in America. 

A resulting jump in American bond yields had sparked risk aversion globally and hit China hard. 

Foreign investors, who had helped fuel China’s equity rally last year, retreated. 

Reacting to the same signals, big domestic fund managers also rushed to pare their holdings.

The sell-off, in other words, furnished evidence about two important areas of progress in China’s capital markets: they are both more professional and more interwoven with global finance than before. 

At the same time, incessant talk about the national team was a reminder of the idiosyncrasies of finance in a state-dominated economy—idiosyncrasies that matter ever more to the rest of the world.

Just five years ago no analysis of finance in China was complete without a detailed look at shadow banking. 

Formal banks were too strictly controlled to satisfy borrowing needs in the fast-growing economy. Stock and bond markets were underdeveloped. 

So between the cracks, lightly regulated institutions cropped up, willing to lend to anyone with collateral—especially property developers and miners.

Banks, despite their conservative exterior, had a big hand in shadow financing. 

They got around caps on deposit rates by funnelling savings into opaque “wealth-management products”, a chunk of which flowed through the shadow firms. 

Some of these products offered yields of over 10%. 

Yet they enjoyed informal guarantees from the state-owned banks, making investors think that they were as safe as deposits. 

The shadow-banking industry grew to 28.5% of banks’ total assets in 2016.

Around that time a series of messy defaults alerted regulators to the dangers. 

They began a campaign to unwind the shadow financing. 

They forced trust companies to hold more capital. They stopped banks from offering guarantees on wealth products. 

And they opened the door to a new professional fund industry, pressing banks to launch formal wealth-management subsidiaries, rather like asset-management groups in developed markets.

Banks are barred from investing in equities but the new divisions face no such rules. 

They cannot, however, offer guarantees. 

Contracts specify that in a downturn investors will face losses. 

Some banks’ wealth units manage their own funds; others team up with outside managers. 

Much of the money flows into the stockmarket.

The ubiquity of mobile payments has given ordinary people another route to funds. With a few taps users of Alipay or WeChat Pay can choose from hundreds of products. 

China’s 100m or so retail punters have long believed that they can beat professional investors. 

But that sentiment has shifted over the past two years and many are now buying into mutual funds at record pace, says Desiree Wang of JPMorgan Asset Management. 

Much as retail investors have been vocal on social media about the performance of individual stocks, they now debate, laud and criticise the performance of the country’s top fund managers.

Funds are also becoming more sophisticated. 

Since the global financial crisis a stream of Chinese nationals has returned to Hong Kong and Shanghai from London and New York, bringing a new set of skills, says Louis Luo of Aberdeen Standard Investments, an asset manager. 

Funds once limited to plain-vanilla active management have brought in specialists to launch quantitative and absolute-return funds.


These trends have been magnified at China’s big mutual funds. 

Three of the largest mutual-fund companies—China Asset Management, e-Fund and Southern Asset Management—have each surpassed 1trn yuan in assets under management. 

The rate of growth at mutual funds and at the banks’ wealth-management arms is projected to take professionally managed assets in China from around 96trn yuan ($14.7trn) in 2020 to 244trn yuan in 2029, or near the current size of the asset-management industry in America.

Part of that is a hedge-fund industry with Chinese characteristics. 

Regulators forbid the short-selling of individual stocks. 

But scores of big investment managers have emerged, with portfolios that encompass global and domestic assets as well as private and public markets. 

Operations at China’s hedge funds are increasingly similar to those in global financial centres, says Gokul Laroia of Morgan Stanley, a bank. 

The biggest is Hillhouse Capital Management, run by Zhang Lei, with about $70bn under management. 

Some are based offshore with a focus on China like Himalaya Capital, run in Seattle by Li Lu, once seen as a potential successor to Warren Buffett. Investors in China pay close attention to their decisions. 

When it was revealed last year that Mr Li had upped his stake in Postal Savings Bank of China, scores followed his lead. Shares in the bank, long derided as a stodgy state lender, have doubled in price since October.

Hello, world

Professional fund management is now approaching a tipping point. 

Retail investors still make up about 80% of average daily trading volume in the stockmarket; in America, even with the much ballyhooed rise in day trading, they account for just about a quarter. 

Yet institutional investors’ holdings as a share of China’s market capitalisation have increased from 30% in 2012 to about 50%. 

At this pace, says an executive at a Chinese asset manager, institutions’ share of daily trading volume could hit 50% in the next five years. 

For foreign firms, the professionalisation of the markets could present an opening. 

Nothing in China comes easily, though.

For years many officials in China feared that wily Western “wolves” would gobble up the banking market. 

But Xu Zhong, a senior banking official, observed in 2019 that the problem was in fact the opposite. 

“We are not open enough,” he said. 

This hindered development; competition was needed to help local firms improve. 

He added a rhetorical flourish of the kind that wins debates in Beijing: the lack of opening goes against President Xi Jinping’s doctrine that China must be confident in its system. 

China, he concluded, should be bolder.


Mr Xu’s line of reasoning has so far prevailed. 

There are two separate but related openings that are now drawing Chinese and global finance more closely together. 

The first is the opening of China’s capital markets to foreign investors. 

Funds allocated to China have risen rapidly since 2018. 

The inclusion of many onshore stocks into global indices, such as msci’s flagship emerging-markets index, has led to tens of billions of dollars in passive fund allocation a year. 

There has also been a rush into the country’s sovereign and policy-bank bonds, a tempting alternative to ultra-low-yielding bonds elsewhere.

There is still tremendous scope for growth. 

In the onshore stockmarket foreigners hold nearly 5% of Chinese shares; by comparison, foreigners own about 25% of American shares. 

Foreigners own just 3% of Chinese bonds, versus about 30% of the American market, and are overwhelmingly concentrated in government bonds. 

Corporate debt is still seen as too murky.


One obvious concern for foreign investors is whether they can get their money into and, crucially, out of, China. 

Doing so is now easier. 

Hong Kong’s stock-connect programme, which allows trading in Chinese stocks, has fuelled a 40-fold increase in daily cross-border trading volumes in China since 2015. 

Repatriating profits through a qualified institutional-investor scheme used to take up to six months. 

Now it takes a few days. 

The real test will come if markets crash, as they did in 2015. Then, the government made it hard for foreigners to take funds out of the country.

The second dimension of China’s opening is to foreign institutions. 

Investment banks long touted China’s potential yet were granted only glacial increases in their onshore presence. 

Things are speeding up, thanks in no small part to the deterioration in relations between America and China. 

Wall Street banks, the thinking in Beijing goes, are powerful lobbyists in Washington. 

Goldman Sachs, which set up its joint venture in China in 2004, is applying to take over 100% of its onshore investment bank. 

A number of other foreign banks, including Morgan Stanley and ubs, are expanding their domestic businesses.

The optimistic case is that these investments will, in time, pay dividends. 

The oft-repeated line from foreign financiers is that China is a long-term, strategic project. 

When smic, a semiconductor group, listed in Shanghai in July, it raised $6.6bn, the largest offering in China since 2010. 

“That really got people wanting to do more work on initial public offerings (ipos) and look beyond just secondary trading,” says Christina Ma, head of greater China equities at Goldman Sachs. 

To be a full-service investment bank, a patchwork of licences is needed: for wealth management, underwriting and trading, to name a few. 

Some firms are putting them together. 

The disadvantages of being a foreign operator in the Chinese market are disappearing, says Eugene Qian, the chairman of ubs Securities.

The pessimistic view is that China is, and always will be, the market of the future. 

The head of a foreign bank in Shanghai describes China’s regulatory demands as a “purity test”. 

To obtain licences to operate, banks must have teams of underwriters and risk officers in place, all with the right qualifications. 

That drives up staffing costs before any revenue is earned. 

Vanguard, an American asset manager, recently halted plans to launch its own mutual-fund unit in China, citing the time it would take to build up a big presence.

Firms that do make inroads in China may face other headaches. hsbc was long the most successful foreign commercial bank in China. 

Now it is caught between Beijing and America after being entangled in a dispute over Huawei, a Chinese telecoms giant. 

Banks will need to be skilful at managing both their relations with China’s government and their portfolios to stand any chance of success.

The giant ipo of Ant, a fintech group, would have been a monument to the power of China’s capital markets. Instead, it became a monument to the power of its government. 

Officials halted it in November, less than 48 hours before trading was due to begin in Shanghai and Hong Kong. 

Heavy-handed regulatory actions are the most obvious way in which the state exercises control over markets. 

But there are also two more subtle points of influence.

First, even as the government has pulled back from day-to-day economic management, state-run firms cast a shadow over everyday business.

State-owned investment banks may be less capable than foreign upstarts. 

But most big firms that turn to the capital markets know to give most of their business to state players.

The state is also an investment force to be reckoned with. 

Government-guided funds, which channel cash to companies in priority sectors such as chipmaking, have amassed about 9trn yuan in capital, and are growing quickly, according to China Venture, a research firm. 

“If they choose to compete in a certain area, you know you can’t outbid them,” says the head of a big private Chinese investment company.

Second, the state sets rigid parameters around its markets. This is felt most acutely in foreign-exchange trading because of China’s careful management of the yuan. 

Though it is now easier for investors to move money across borders, they still face a host of rules once in China. 

If foreign firms, for example, do well trading equities, they typically must take their profits out of the country before reallocating money to bonds. 

Moreover, there are few currency-hedging tools in the onshore market, a hindrance for big investors. 

Offshore hedging is possible but expensive.

A stately manner

Over the past few months, the strength of currency inflows into China—via both its trade surplus and inbound financial investments—implied that the yuan should have appreciated strongly. 

The head of a currency desk at a foreign bank in Shanghai says the central bank, acting through proxies, appeared to restrain it. 

“Whenever the yuan rose to 6.45 [against the dollar], big Chinese banks came in to stop it,” he says. 

Without an open capital account, all prices in China’s markets end up skewed. 

Stocks in Shanghai and Shenzhen trade at a premium of roughly 30% over stocks in the same companies listed in Hong Kong.

Few dare to go against the state. 

The China head of a global hedge fund reports that one unusual aspect of the mainland is that securities regulators conduct random inspections, turning up without warning and demanding answers to probing questions. 

“They would only do that in New York if you’re under arrest,” he says.

Yet the controls around China’s markets can exert a pull of their own. 

Whereas China trails America in the size of its stock and bond markets, it is, by one measure, ahead in commodity futures. 

The number of contracts traded last year on its main exchanges (in Dalian, Shanghai and Zhengzhou) was six times higher than on America’s cme Group’s exchanges. 

In terms of value they were roughly equivalent.



It is not just that China has the biggest appetite for commodities, from copper to iron ore. 

It is also home to some of the world’s most liquid commodity exchanges. 

Smaller contract sizes make it easier for small companies to get involved in trading. 

And the very limits that Chinese investors face on investing offshore make commodity exchanges attractive. 

“There may be more contracts on foreign exchanges but not many have truly excellent liquidity. 

In China most contracts are liquid, giving investors lots of opportunities,” says Sunny Fang of Orient Futures, one of China’s biggest futures brokerages.

Commodity futures also show how China’s markets shape global markets. 

Last April the price of oil futures in America collapsed below zero as demand evaporated and storage filled up. 

In China, though, futures stayed at around $30 a barrel, with investors lapping them up. 

That attracted shipments to China and helped restore global oil prices to a more normal level.

“The information from Chinese futures is very clear. 

This is what the world’s biggest consumers are paying for commodities,” says John Browning of Bands Financial, a Shanghai-based futures brokerage. 

Whether in China or Texas, oil is oil, and prices should converge.

The information from China’s stock and bond markets is more abstract. 

It tells you about the health and direction of the economy—no small thing given China’s weight in the world. 

Yet interpreting it is not simple. Portfolio managers at Chinese investment groups have learned Western-style stock analysis but they also understand the Chinese regulatory environment, which can be crucial to performance, says Xu Yicheng of China International Capital Corporation, an investment bank. 

It is a divide that global firms and investors increasingly think they can, and need to, straddle. 

Joe Biden’s chance to end middle class stagnation

The coming boom gives the president a window to reset US capitalism, but it may close quickly 

Ed Luce

© Matt Kenyon


Once every generation or so, America’s social contract changes. 

After half a century in which capital has been in the driving seat, Joe Biden has a chance to tilt the advantage back to labour.

Such an opportunity would have been unthinkable a year ago. 

The US left can thank the pandemic for this change in the political weather. 

Biden has so far not let the global health emergency go to waste. 

The question is whether he can build on the recently passed fiscal stimulus to shift bargaining power towards the American worker.

The macro-conditions Biden faces are close to ideal. 

With the US set to reach herd immunity in the early summer thanks to its vaccination programme, growth will come roaring back as social distancing recedes. 

The coming boom will be fuelled by the release of pent-up consumer demand that has pushed America’s personal savings rate to a record high, now being lifted even higher by the latest federal stimulus. 

Growth is expected to top 6 per cent this year, according to the Federal Reserve, which will more than erase last year’s losses.

The central bank’s stance is about as dovish as it can get. 

This week Jay Powell, the Fed chair, basically guaranteed that he would tolerate inflation above 2 per cent for a sustained period. 

The Fed does not expect to lift its benchmark interest rate before 2024. 

Rarely do central banks promise to keep the punch bowl filled as the party gets going. 

Biden is inheriting an optimal two-year window to spread the fruits of unchecked growth to America’s middle classes.

On its own, however, a strong US rebound will not change the structure of the economy, nor do much to dent America’s acute inequality. 

Most of the income portions of the $1.9tn American Rescue Plan Act consist of one-off transfer payments and an extension to unemployment payouts. 

They will comfortably tide people over the pandemic. 

The question is what Biden can do to alter the rules of the game for the long term after the economy returns to trend growth.

The starting point is to acknowledge that America’s median income stagnation is in some part the result of decisions taken by politicians. 

Until recently, the left and right agreed, as Bill Clinton once put it, that globalisation was “the economic equivalent of a force of nature”. 

It followed that there was little government could do, other than encouraging people to boost their skills, to shield Americans from the global chill winds.

This was a cop out. Since the 1970s, Washington has done plenty to weaken the power of trade unions, cut social insurance and allow educational costs to increase beyond the reach of ordinary Americans. 

Instead of cushioning such trends, successive US administrations, including Democratic ones, leaned in further.

Tony Blair, the former British prime minister, once said: “I hear people say we have to stop and debate globalisation. 

You might as well debate whether autumn should follow summer.”

Today both left and right are happy to have that debate. 

But they are nowhere near consensus. 

The Republican party tends to blame China almost exclusively for America’s middle-class struggles. 

Leftwing Democrats prefer to target America’s super-wealthy. 

Neither side focuses enough on the downward impact of technology on the price of American labour. 

The remedies for this come in three tranches: boosting US labour productivity; ensuring that workers take those gains in higher pay and benefits; and lifting support for those left behind.

The first is basically the goal of Biden’s Build Back Better programme. 

He wants to pour money into green technology and broadband. 

The second involves boosting employee leverage and tackling oligopoly across the US economy. 

All three entail making the US tax system more progressive.

However, each of these, particularly a $15 minimum wage, higher corporate taxes and pro-union legislation, are likely to run aground on Senate obstructionism. 

It is quite possible that Biden’s historic window will slam shut in the coming weeks.

At which point he would face a choice: embrace Senate majority votes by scrapping its 60-vote filibuster, or allow the US economy to drift back to pre-pandemic rules. 

The latter would be tolerable. 

After 40 years of stagnation (barring a strong blip in the 1990s) median income grew between 2015 and 2019, mostly because of falling unemployment. 

Jason Furman, a Harvard professor and former chair of the Council of Economic Advisers, estimates that the middle class recaptured about a tenth of what it lost in those years. 

But at that rate, and assuming no recessions, it would take another 40 years to regain its share of the economy.

My bet is that circumstances will push Biden down the more radical path. 

More than 70 per cent of Americans support the stimulus, including a majority of Republicans. Donald Trump proved two things about US politics. 

First, rightwing voters are fine with budget deficits, as long as they benefit. 

Second, they are highly receptive to cultural and racial appeals.

Biden, in other words, has a chance to take the sting out of US populism with a game-changing economic agenda. 

It is a historic opening that is unlikely to come again soon. 

He must weigh that against the cost of preserving the Senate veto for a party that increasingly talks only about culture. 

As time goes on, it will seem like no choice at all. 

When Influence Reaches a Tipping Point

Russia in Venezuela is a great example of what we mean when we talk about “influence.”

By: Allison Fedirka


“Influence” and “presence” are among the most misused and overused words, even by us, in geopolitical analysis. 

We all know what they mean, and yet they don’t mean much if they aren’t properly explained. 

Influence can mean mutually beneficial business interests between two countries, or it could mean the infiltration of one country’s intelligence operatives by the intelligence agencies of another. 

Breadth and depth of “influence” matter, as does the strategic value of the area or industry influenced. 

Dominating a country’s military supply chain is not the same as dominating the culinary scene.

It’s therefore critical to understand when “presence” and “influence” reach a point where they spur a country to action. 

Russian influence in Venezuela is a case in point, especially because it will play a role in how the United States crafts its security relations with Colombia.

Venezuela has maintained strong ties with Russia for decades. 

Over the past few years, though, Russia has changed the way it engages with Venezuela, de-emphasizing its economic relationship (joint ventures and other energy-related projects) and prioritizing, albeit subtly, its security relationship. 

Growing U.S. sanctions against Venezuela, depressed oil prices, mounting domestic instability and financial difficulties for the Russian government meant Russia had to take a more pragmatic approach to its business ventures. (Hence, the departure of Rosneft in 2019.) 

Rather than abandon Venezuela’s energy sector, Russia shifted its engagement style. 

Russia maintained control of its Venezuelan assets by creating Roszarubezhneft, a parent company that took control over the security company Chop RN-Okhrana-Ryazan, which holds Russian energy assets in Venezuela through its 80 percent share in the National Petroleum Consortium. 

Russia also leveraged its energy expertise to install its people and its business practices in the highest levels of PDVSA management, giving Moscow the ability to shape the decisions and strategy of the Venezuelan state-owned oil company. 

This has helped Russia facilitate the sale of Venezuelan crude despite U.S. sanctions.

Changes are underway on the military front too. In the late 2000s and early 2010s, Russia was heavily engaged in financing Venezuela’s purchase and modernization of military hardware, including the iconic S-300 air defense systems and Su-30 fighter jets. 

Financial constraints facing both countries and deteriorating stability within Venezuela put an end to major hardware modernization initiatives. 

Russia could no longer ensure the safety of its equipment under the Maduro regime or, worse yet, in the event that pro-U.S. groups succeeded in replacing the regime.

Now Russia takes a more subtle, though still important, approach with Venezuela and military cooperation. 

Over the past three years, the Russian military has sent several strategic military planes to Venezuela for visits, including the nuclear-capable Tu-160 Blackjack bombers, AN-124 cargo plane and Il-62 passenger plane. 

More recently, at the end of 2020, it was reported that a Tu-154, which is registered to the FSB intelligence service, entered Venezuelan airspace. 

Its whereabouts are unconfirmed. 

More, some 100 Russian troops arrived in Venezuela back in 2019 – a size suitable for advisory activities rather than kinetic fighting. 

This year, there have been reports that Russia has provided anti-terrorist and insurgent training for the Venezuelan armed forces. 

And last October, President Nicolas Maduro announced the formation of a science and technology military council that included Cuban, Russian, Iranian and Chinese advisers.

Russian engagement with Venezuela is all the more relevant in light of the conditions and crises faced by the Maduro government. 

Maduro lacks the charisma and natural leadership demonstrated by his predecessor, the late Hugo Chavez. 

Maduro has instead constructed – sometimes deliberately, sometimes inadvertently – a governance structure that disseminates power to different groups, cohered by mutual dependence, to maintain power. 

This has created conditions in which Russian contributions and activities play critical roles in keeping Maduro in power. 

Russia’s work in the energy sector gives it control over one of the government’s most valuable assets, even if it is in disarray. 

Its assistance in exports also helps funnel in U.S. dollars to the Venezuelan government despite U.S. sanctions. 

Russia’s military training will equip Venezuela’s domestic forces with the skills needed to help better prevent and quell mounting internal unrest over deteriorating living conditions and general discontent with the government. 

With the military flights, Russia has demonstrated that it can move military personnel and equipment in and out of Venezuela with ease. (There have been suggestions that this cooperation could include an intelligence component as well.)

In short, the deterioration inside Venezuela allowed Russia to assume a more prominent role in keeping Venezuela’s economy afloat, its military prepared, and its intelligence informed. 

It controls the strategic assets and markets on which the government depends. 

Moscow doesn’t outright pull Venezuela’s strings, but it clearly has enough influence to affect outside actors.

Enter Colombia and the United States. 

Like many of its neighbors, Colombia started to modernize its military some time ago. 

The country’s defense industry has made some advances toward developing indigenous equipment like unmanned aerial vehicles, air-defense systems, patrol boats and amphibious ships. 

However, domestic production remains inadequate for its needs, so Bogota relies heavily on foreign imports. 

Its military and security forces face capability gaps due to outdated legacy systems and insufficient amounts of strategic equipment. 

Given the long-standing security relationship between the U.S. and Colombia, and the fact that the U.S. has been a major weapons supplier to Colombia in the past, a substantial U.S. role in Colombia’s modernization effort would be a natural fit.

The decision to purchase military systems and fleets comes with a host of domestic and international considerations. 

Given Russia’s influence in Venezuela, the reaction to potential U.S. arms sales needs to be factored in to the decision-making calculus since it could provoke a retaliatory response. 

In the case of Colombia, most of its security efforts focus on counterinsurgency and counter-narcotics operations. 

More recently, containment of any spillover effect from Venezuela’s instability has also been included in defense strategies. 

To do this effectively, Colombia must be able to reach and control remote areas of its porous borders, particularly with Venezuela, where these illicit groups and activities occur. 

Currently, the Colombian government plans to acquire a new fleet of fighter jets to support these efforts, and the U.S. is a frontrunner in the bidding. 

Follow-on deals for improved radar systems and air-defense are also likely in the future. 


The acquisition of this equipment and capability by Colombia will likely aggravate Russia. 

Any reconnaissance or radar equipment risks making its low-profile military activities more visible. 

A new fighter jet fleet, depending on the defense contractor, could also make Russia and Venezuela feel more threatened. 

For example, Moscow would view the selection of F-16 Block 70 jets as a greater threat than the Gripen NG, which it believes to be an inferior aircraft to its Su-30s. 

Any perception that the U.S. is moving in to secure a stronger military posture with the Colombians – which the sale of F-16’s would do – could be grounds for a Russian reaction. 

The concern for the U.S. on this front is what that potential reaction would look like. 

Washington does not want to risk sparking a military spending spree with Russia in Latin America; nor does it want to see Moscow reinforce or send new security deployments to counter U.S. interests in sensitive areas overseas.

The U.S. has already subtly demonstrated its need to factor the Russian presence into its response to its Venezuela strategy. 

U.S. security officials have repeatedly warned this year that Russia and Iran are destabilizing Latin America and mentioned Colombia by name. 

They also noted actors based in Venezuela and Cuba as having a secondary role (Russia was cited among the primary culprits) in meddling with U.S. 2020 elections. 

These are low-level commentaries that signal a clear message that Russia’s place in Venezuela is noticed and seen as increasingly problematic. 

Russian activity in Venezuela is strong and in strategic areas such that it can affect decisions made not only by the Venezuelan government but also outside players like the U.S. and Colombia. 

Russian presence in Venezuela is making the U.S. and Colombia think more cautiously about how they will pursue military and defense ties in the future.

Blackstone’s Crown Deal Has Dice Loaded in its Favor

The private-equity giant’s offer for casino operator Crown Resorts has some of the hallmarks of a good deal

By Jacky Wong

Crown’s skyscraper casino-hotel in Sydney overlooks the harbor. / PHOTO: BRENT LEWIN/BLOOMBERG NEWS


Financial markets are often compared to casinos and financiers to gamblers. 

Sometimes that turns out to be true quite literally: Blackstone BX -0.77% is placing a timely bet in Crown Resorts. 

CWN 21.40% That bid looks likely to turn out well.

The private equity giant has offered the equivalent of $6.2 billion to buy the troubled Australian casino operator Crown Resorts, according to exchange filings Monday. 

Blackstone is clearly trying to take advantage of Crown’s recent troubles.

The gambling regulator of New South Wales state said last month that Crown isn’t suitable to hold the license for its new Sydney casino, after a scathing report—which the regulator had commissioned—found the company had facilitated money laundering. 

Since then, two royal commissions have been announced to look into Crown’s existing casinos in Melbourne and Perth. 

Crown’s chief executive has resigned. 

Billionaire James Packer, who owns more than a third of Crown through his firm Consolidated Press Holdings, may be forced to exit his stake.

Blackstone is no stranger to casinos. 

For one, it already owns 10% of Crown. 

It also bought stakes in some Las Vegas resorts and casinos, including Bellagio and MGM Grand from MGM Resorts in 2019 and 2020 and then leased them back to the casino operator. 

And it bought Cosmopolitan, a Las Vegas hotel and casino that ran into financial trouble, in 2014.

Crown’s prime real estate—its skyscraper casino-hotel in Sydney overlooking the harbor is the city’s tallest building—is surely a good bet all by itself, especially if Blackstone manages to buy at its lowball bid.

The bid represents a 20% premium to Friday’s close, but it’s still lower than Crown’s share price was at the beginning of 2020, before the pandemic and regulatory uncertainties. 

The offer price is also 20% lower than the short-lived partially cash bid from Wynn Resorts in 2019. 

Many leisure and hotel stocks have already surged above pre-pandemic levels. 

Blackstone’s offer price translates to an enterprise value to next year’s estimated earnings before interest, taxes, depreciation and amortization ratio of 11.6, according to S&P Global Market Intelligence. 

That is lower than many U.S. casino names like Las Vegas Sands and Wynn Resorts.


Crown shares rose 21% Monday—1% above Blackstone’s offer price, meaning the market thinks a better bid could be coming. 

Crown, which hasn’t formed a view on the bid yet, may be able to try to squeeze a bit more from the private-equity firm.

There is also a chance that other bidders emerge, though Blackstone has the advantage of being a pure financial buyer. 

Blackstone’s existing 10% stake came from Melco Resorts & Entertainment after the Macau casino operator’s interest in Crown led to investigations into its alleged links to criminal groups. 

Other casino operators from the U.S. or Macau might also face regulatory scrutiny. 

Crown may be too big a prey for its Australian rivals like Star Entertainment.

Blackstone has good odds of winning the crown jewel Down Under.