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A deal for an Australian dairy wrapped in layers of Chinese loans

SMITHTON, Australia — Not long after China’s 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 US$200 million (S$272 million).

In an undated handout photo, Mr Lu Xiangeng on Australia’s largest dairy, which he bought in 2016. The acquisition of the dairy was funded by loads of debt, the type of opaque deal-making that worries regulators around the world. Photo: Chris Crerar via The New York Times

In an undated handout photo, Mr Lu Xiangeng on Australia’s largest dairy, which he bought in 2016. The acquisition of the dairy was funded by loads of debt, the type of opaque deal-making that worries regulators around the world. Photo: Chris Crerar via The New York Times

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SMITHTON, Australia — Not long after China’s 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 US$200 million (S$272 million).

It looked like a good match. Australia was hungry for Chinese money. And the businessman, Lu Xianfeng, presented himself as a well-heeled investor, promising to protect existing jobs and add even more.

Like much of the splashier overseas spending by Chinese conglomerates, the acquisition of the dairy was financed by layers upon layers of debt, the type of financial complexity and opaque deal making that worry regulators in China and around the world.

Mr Lu paid for the purchase with three loans, one from a lender in Australia and two from Chinese lenders, including the biggest state-run bank, the Industrial and Commercial Bank of China, according to the filings of his publicly traded company. He then pledged shares in the public company, Ningbo Xianfeng New Materials, to raise even more money. Lately, his businesses have been on shaky financial footing, with Ningbo Xianfeng halting trading in its shares in China, citing a restructuring.

The deal is part of a problematic pattern as indebted Chinese companies buy marquee assets in the United States, Europe, Canada and Australia. China was Australia’s largest source of foreign investment in 2016, as measured by approved deals.

China has started to rein in big players like the Anbang Insurance Group, Fosun International, the HNA Group and Dalian Wanda, concerned that their piles of debt, largely from state-run banks, threaten the financial system and economic growth. Foreign governments, too, are wary of the flood of Chinese deals, with complex ownership structures that make it difficult to discern the strategic motivations and financial health of the buyers.

While Australian politicians generally view Chinese investment as advantageous, there are increasing worries that the government is approving deals by problematic companies aligned with a potential adversary.

The attitudes toward Chinese money have been complicated by recent controversies about election-campaign donations from Australians of Chinese descent with links to the Chinese government.

The acquisition of the Tasmanian dairy, known as Van Diemen’s Land Company, or VDL, is spurring questions about whether the Australian government is fully assessing the risks.

Major purchases by overseas buyers are vetted by Australia’s Foreign Investment Review Board. While the board analyses deals for threats to the country’s national interests, its mandate does not require deep due diligence on the buyers’ finances.

“The Australian assumption has been that Chinese business operates like Australian ones,” said Mr Peter Jennings, executive director of the Australian Strategic Policy Institute. “But they operate in ways that don’t fit with how 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 capacity, 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 in Darwin in 2015, is facing financial troubles. Landbridge is trying to secure loans from lenders, including China’s Export-Import Bank, raising concerns about why a facility near Australian and US defence forces may become tied up with a state-run Chinese lender dedicated to carrying out Beijing’s policy goals.

In a sign of the growing sensitivity, the Australian government rebuffed two offers from Chinese companies to buy the nation’s biggest cattle ranch, S Kidman and Company, on the grounds the deal was against the country’s interest. A year later, a Chinese buyer took a minority interest with an Australian businesswoman, Gina Rinehart.

Mr Lu did not respond to requests for comment sent through his Chinese and Australian companies. A spokeswoman for his Chinese company, Ningbo Xianfeng, declined to comment.

A spokesman for the Australian treasurer, Scott Morrison, said in a statement that “the government considers a broad range of factors against the national interest when assessing foreign investment proposals,” including financing arrangements and impact on the economy.

Chinese money has poured into Australia, where buyers are seeking wide-open spaces, fresh produce and a stable economy. In the last decade, Australia was the second-biggest recipient of Chinese money, just behind the US, according to a study by the accounting firm KPMG.

Chinese players vied for cattle ranches, wineries, ports and mines. Tens of thousands of homes were snapped up.

The Tasmanian government has been courting Chinese investors since it hosted Mr Xi with fanfare in 2014. Bolstered by an Australia-China free trade agreement, Tasmanian exports of fresh produce to China have soared.

From the outset, the deal for the lush land perched high above the southern Pacific Ocean attracted attention. The roots of VDL, Australia’s most prestigious dairy, stretch back to the settlement of Tasmania by the British in the early 1800s. The British owned it for more than 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 window shades, created an Australian company, Moon Lake Investments, to buy the dairy. He promised to invest an additional A$100 million (S$107 million), preserve the existing 140 jobs and add up to 95 others. He vowed to export fresh milk from the farm to an expanding Chinese middle class desperate for quality assurances and covetous of imported food.

“Here was a proposal from a savvy Chinese investor,” said the chief executive of VDL Farms, Evan Rolley, a former state government official. “He could take the Tasmanian product right into the consumer markets in China.”

To help gain acceptance in tight-knit Tasmania, where the population is just 500,000, Mr Lu chose a well-connected former politician, David Crean, as the deputy chairman of Moon Lake. He impressed officials with his pledge to honour the cultural heritage of aboriginal people on the property, Mr Rolley said.

“They have a naive fixation” with China, Mr Mark Harrison, associate professor of Chinese Studies at the University of Tasmania, said of the state government.

“Mr Lu’s financial problems were well covered in the Chinese press and in financial filings,” he said. “I know about them. Why doesn’t the government?”

After striking an agreement to buy the dairy in late 2015, Mr Lu established Kaixin Investment, a Ningbo-based company, to acquire the assets. That company obtained loans of US$74 million from the Industrial and Commercial Bank of China and US$22 million from the China Zheshang Bank to finance the purchase.

The loans were guaranteed by Ningbo Xianfeng, which in turn was backed by all the dairy farm’s assets, according to corporate filings. Separate public filings showed that a US$56 million loan from Rabobank in Australia also funded the deal, debt that was also backed by the dairy’s assets.

The Chinese loans were not presented to the review board, according to the managing director of Moon Lake, Sean Shwe, who helped prepare documents for the board. Mr Shwe said he was not aware of the loans from the Chinese lenders.

Around the same time, Mr Lu began arranging other funding in China. He handed over blocks of shares in Ningbo Xianfeng to lenders as collateral for loans, eventually pledging 95 per cent of his shares, according to corporate filings.

Such loans are generally extended at high interest rates. They can sour quickly if shares plunge in value, a possibility in China’s seesawing stock market.

In an interview, the spokesman for Mr Morrison, the Australian treasurer, said that he was “comfortable with the advice provided by the review board on the dairy acquisition.”

The Australian review board said the documents presented by the Chinese buyer were confidential.

Rabobank declined to comment.

After the purchase closed in March 2016, Mr Lu tried to sell the dairy to his publicly traded company in a deal that would have paid off the Chinese loans. But the China Securities Regulatory Commission barred that transaction, citing “uncertain” future profits from the dairy, a decision based on declining earnings prompted by plunging worldwide milk prices.

Mr Lu’s businesses have been struggling. Ningbo Xianfeng has not traded since April. It announced in July that profits were expected to drop at least 70 per cent in the first six months of 2017.

The window-shade business Mr Lu owns in Perth, Australia, has failed to turn an annual profit since Ningbo Xianfeng acquired it in 2014.

Last month, Ningbo Xianfeng announced it would sell an online auto-parts business in Shanghai. Employees had staged a revolt, saying Mr Lu didn’t live up to his pledges, according to news media reports and public filings. THE NEW YORK TIMES

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