Following the most recent Chinese takeover of a European club, Part 1 took a look at what Southampton fans can expect from their new owner. Part 2, below, will analyze what the latest policy moves from Beijing mean for the future of Chinese investment in football – and why future deals may or may not happen.
Reading the impulsive press headlines over the past few weeks, it would be easy to conclude that Gao Jisheng‘s purchase of an 80% stake in Southampton FC could just be the last Chinese takeover for a while.
Bad news, right? The reality, however, is somewhat less clear.
First, let’s take a look at what these new rules actually mean when it comes to outbound Chinese investment in football. On August 18, the State Council released a document on overseas investment in which it:
- Banned: Core military technology, gambling, sex industry, investments contrary to national security
- Restricted: Property, hotels, film, entertainment, sports, obsolete equipment, investments that contravene environmental standards
- Encouraged: Investments that further “Belt and Road” framework, enhance China’s technical standards, research and development, oil and mining exploration, agriculture and fishing
Explaining the decision, the State Council said:
“Profound changes are taking place in international and domestic situations, and Chinese enterprises face not just relatively good opportunities but also various risks and challenges in overseas investments.”
Meanwhile, the National Development and Reform Commission added:
“Some companies focused on property rather than the real economy, which, instead of boosting the domestic economy, triggered capital outflows and shook financial security. Some companies disregarded the environment, energy and safety regulations in target countries, which resulted in disputes and impaired China’s image.”
It’s worth remembering that these rules are simply codifying what officials have been saying since November 2016, after which five European football clubs have been acquired by Chinese investors [AC Milan (100%), Southampton (80%), Reading (75%), Parma (60%), Northampton Town (60%)]. So if the tide turned nearly a year ago, either the rules – de facto or otherwise – don’t really mean much, or the authorities are being incredibly slow to enforce them.
However, if there’s one thing I’ve learnt over the last decade of observing the sports industry here – and China as a whole – it’s that rules, while plentiful, are there to be maneuvered around. Break the rules and you can find yourself in a ton of trouble, but exploit a loophole and that’s considered fair game – at least until that particular loophole is closed and you’re forced to look for new avenues of opportunity.
There are, of course, exceptions, and several of the big players, including Wolves owner Fosun and Atletico Madrid minority shareholder Wanda Group have had their overseas deals scrutinized (though not, apparently, the sport-related ones), but that doesn’t seem to have had much effect as per the usual “killing the chicken to scare the monkeys“.
But let’s return to the document.
“Banned” is clear – don’t go there, ever – while “encouraged” is also straightforward, which leaves the decidedly grey area of “restricted”. Within this category, there must also be some differences from one end of the restricted spectrum to the other, although nothing that the regulators have chosen to make public. But it’s important to note that the government has not wavered at all from its plan to turn the sports economy into the largest in the world, worth (they hope) $800 billion by 2025. That has been reinforced in just the past few days, with President Xi Jinping urging “saturation in sports“. In other words, investment in some parts of the sports world is rather more encouraged than in others.
So if the current wave of Chinese investment in football – specifically in European clubs – is to continue, any future acquisitions would seem to fall into three distinct groups:
- Acquisitions that carry out China’s sporting goals.
- Acquisitions that carry out China’s other goals, such as the Belt and Road initiative.
- Acquisitions that circumvent the rules.
Acquisitions that carry out China’s sporting goals.
The first group is arguably the hardest of the three, given that Chinese investment in football overseas has relatively little to do with either boosting China’s domestic sports economy or improving the standard of football within China. However, all is not completely lost here.
You could make a case that a club has a particular good youth academy, for example, which could fast track the development of Chinese youngsters from an earlier age, but Southampton has produced the likes of Gareth Bale, Theo Walcott, Luke Shaw, Adam Lallana and Alex Oxlade-Chamberlain over the past decade or so, and that doesn’t seem to have been Gao’s line of argument. Besides, while owning an academy makes it easier to fill it with players of your choice, or even bring the specialized training methods back to China, it’s not a necessity to actually buy the club to do so, given that a close partnership between two clubs would serve the same purpose.
The only other avenue I can see that might fit this group is the purchase of one of football’s truly big clubs. Given that Real Madrid and Barcelona aren’t available to buy due to their supporter-owned models, that really leaves Manchester United, Manchester City, Liverpool and….well, that’s probably about it. Buying either of those clubs would cost a pretty penny in today’s environment – more capital outflows that the government would be none too happy about – but the global nature of the clubs and their fan bases would add a fair amount of prestige for China, as well as generate some income that could be funneled back home. It’s the longest of long shots at this point, but it’s just about possible.
Acquisitions that carry out China’s other goals
You only need to read the “encouraged” list – enhancing technical standards, research and development, oil and mining exploration, agriculture and fishing – to realize that there’s not a whole lot in there that has even a remote connection to football.
Brighton? Fishing town? Done? No, probably not that simple.
The big exception here is the all-encompassing “Belt and Road” framework, which started off as a modern-day version of the Silk Road, but has essentially evolved into a strategy through which China can invest in huge infrastructure projects wherever it wants, reaping the benefits of improved trade links on the back end.
Technically, the geographical area in question is everything west of China up to the eastern fringes of Europe, but there are still some clubs that would fit. This list details more than 60 economies along the Belt and Road. Two that stand out are the Czech Republic, whose Slavia Prague has been majority owned by Chinese investors since 2015, and Ukraine, which boasts two bona fide world-class clubs in Shahktar Donetsk and Dynamo Kyiv – though whether their oligarch owners would be prepared to sell is another matter entirely.
If precedent plays any part in what clubs might make the cut in the regulators’ eyes, here’s where it could get interesting. The Czech Republic borders Germany, a country that can do no wrong in China’s eyes – at least in footballing terms. The Chinese Under 20 national team plays in a regional league in Germany, the two countries have signed a government-to-government footballing pact – much higher than the usual MOUs the Chinese FA has been collecting from their counterparts around the world – and rising Chinese star Zhang Yuning currently plays for Werder Bremen. In summary, the Chinese powers that be clearly think Germany has the perfect footballing model to emulate – and, given that the Germans are current World Cup champions and have finished in the top three in each of the last seven international tournaments they have played, who can blame them?
In other words, if a Chinese entity was looking to buy part of a German club – since the 50+1 rule makes it impossible to buy a German club outright, even if the RB Leipzig model is making that rule rapidly outdated – you have to think a fairly compelling case using elements of both #1 and #2 above could be made to convince Chinese authorities to give the green light.
From there, it’s not too hard to make the link to other clubs in other countries. I’ve heard one line of thought that says the four West Midlands clubs now owned by Chinese investors – West Brom, Aston Villa, Birmingham City and Wolves – were acquired because it could help China export its high-speed train technology as and when the UK decides to improve its rail links to that part of the country. That sounds like a bit (lot) of a stretch to me, but you can be sure that some canny deal makers will be coming up with all sorts of ways to present a football club purchase as something that slots seamlessly into China’s grand plan.
Acquisitions that circumvent the rules
Of course, the easiest way to get a deal done in today’s climate is to bypass the regulators entirely. To my earlier point that rules in China are seen as obstacles around which to navigate, I refer you to the new rule in this season’s Chinese Super League which mandated that at least one Under 23 Chinese player must start every CSL game, ostensibly as a way to give more opportunities to young Chinese players. The intent was honorable, but the implementation was flawed to the extent that teams did indeed start the U23 player, but several would then sub him off within the first ten minutes of every game.
And the league did nothing.
It’s the mentality that is important here. The spirit of the law was plain for all to see, but if there was a way to break the spirit without breaking the letter of the law, then clubs were always going to do so.
Similarly when it comes to outbound Chinese investment in football, the government has – quite rightly – questioned the true motivations behind many of these overseas acquisitions, so it’s tightened the restrictions for deals across a variety of sectors by scrutinizing the money leaving China. But if there is a way for these deals to keep getting done, you can be sure individuals, brokers and companies will find a way.
In the case of AC Milan and Southampton, these deals were completed because the money never came from the Chinese mainland. In AC Milan’s case, the state-backed Chinese bank that was originally slated to underwrite the deal pulled out due to pressure from regulators (see the previous paragraph), so the buyer, Li Yonghong, simply found a US hedge fund to put up the money in its place.
Likewise, Southampton was originally going to be bought by the Shenzhen-listed Lander Sports, but the company released a statement to the stock exchange in which it said it was ending its interest in the club because it doubted whether it would be able to secure approval from certain government bodies. So Lander boss Gao Jisheng simply bypassed the rules, using funding from a Hong Kong bank, which, while in Chinese territory, counts as “offshore” and so is not subject to mainland approvals.
These are not isolated incidents: they are part of the latest wave in the cat-and-mouse game businessmen play with the regulators. Take this comment on Wolves owner Fosun, who have been one of four so-called “grey rhinos” to be under a particularly bright spotlight in recent weeks:
“Fosun is either cheerfully ignoring the Beijing crackdown — or has worked out the secret to playing by the rules.”
Meanwhile, everybody’s favorite Twiterratus, Aston Villa owner Dr Tony Xia, had this to say in response to a link of an article with the comment “Dr Tony drops purchase of Hollywood Studio ‘Millennium Films’.”:
It's not accurate.We changed another entity not pub listed firm 2continue the deal as the new Chinese policy of Film Industry restriction. https://t.co/DzW9DNxqMJ
— Dr. Tony Xia (@Dr_TonyXia) August 31, 2017
Then, when pushed on what exactly he meant by that, he replied to my tweet about a lack of transparency as follows:
I don't want say something hypocritical to make someone happy&it's no value to say some truth to offend someone. Keep quite&working hard. https://t.co/uxIuvVZlyg
— Dr. Tony Xia (@Dr_TonyXia) August 31, 2017
In an eerily similar parallel to the Lander-Gao-Southampton deal, Xia’s main vehicle Recon told the Shenzhen stock exchange last week that it had terminated its interest in Millennium Films, only for Xia to seemingly contradict that, leading to the FT’s sub-heading:
“Aston Villa FC owner Tony Xia confident of bypassing Beijing’s investment restrictions”
So, business as usual?
While it’s clear that the landscape has changed dramatically from two years ago, but it’s equally clear that deals are still continuing, largely through this third route of using offshore vehicles and financing, which bypasses regulators since it doesn’t involve capital outflow from the mainland. There has been talk about blacklisting companies who don’t abide by Beijing’s latest restrictions and it may well be that this loophole is closed before too long. But history has shown us time and again that a closing of a loophole simply drives innovation in other places until the next creative solution is found.
Disagree or have other solutions for buying clubs? I’d love to hear from you in the comments below!