LONDON: For China's Communist party, its foreign exchange reserves are a symbol of national strength and a crucial buffer against economic shocks. So the alarming announcement that its forex reserves had fallen below US$3 trillion in January marked a shift in political faultlines that is only being felt this summer.
As more than US$1 trillion left the country over the previous 18 months amid a flurry of large overseas acquisitions, a sense of crisis grew within the party.
Technocrats in Beijing had already prepared the ground to take action. In December, they had managed to link the phrase "national security" to the concept of financial risk at the annual agenda-setting economic work conference. Backed with the reserves figures, they were poised to strike against what they saw as the leading culprit - the new generation of highly acquisitive private Chinese companies.
These tensions within the system have exploded into the open in the past two months with the humiliation of some of China's best-known and most well-connected private companies, which in recent years have acquired high-profile foreign assets such as New York's Waldorf Astoria Hotel and French leisure company Club Med.
In an abrupt turn, a group of businessmen once lauded as the international face of China are now derided in state media as the instruments of systemic financial risk. The private sector has been shaken by leaked documents, smears and the detention of China's brashest businessmen.
IN SERVICE OF THE CHINESE COMMUNIST PARTY
The seemingly technical issue of a drop in forex reserves has become a political weapon as President Xi Jinping tries to consolidate enough power to control his own succession. Attacks on private financiers have allowed him to pick off the support base of rival factions.
"Private capital is welcome as long as it's in the service of the (Communist) party," says Fraser Howie, co-author of Red Capitalism and an expert in Chinese regulation. This summer, "they've given a very, very strong tug on the leash that's on everyone's neck in China".
The crackdown has allowed the technocrats to rein in some of the worst excesses of a mergers-and-acquisition boom that could have damaged China's economy and reputation.
But it has also resulted in an arbitrary process that has left the private sector with no clear idea of what sort of activity is permitted and which has created mistrust among foreign companies looking to do deals with Chinese firms.
"In some sense, the ban (on outbound investment) probably makes sense from a financial stability perspective," says Zhu Ning, professor at Tsinghua University's School of Finance. "However, such bans without fundamental reform will eventually be futile in reining in capital or adjusting the economic growth model."
The crackdown on the private sector kicked off in June with the midnight detention of Wu Xiaohui, the cocky head of insurance newcomer Anbang Insurance who married the granddaughter of Deng Xiaoping, China's former leader who launched market reforms. Mr Wu has not been heard from since.
In the weeks following his detention, property giant Dalian Wanda and two other companies that personified China's rapid capital outflow over the past two years - airline-to-banking group HNA and consumer conglomerate Fosun - have been targeted by well-placed leaks and state media innuendo.
Together, the four accounted for nearly a fifth of China's overseas purchases in 2016. HNA Group, Dalian Wanda and Anbang were among the top six buyers that year.
SHADOW BANKING AND FINANCIAL SECURITY
For the regulators, one of the specific concerns was that the money used for some of the overseas acquisitions had been raised through a number of potentially risky channels, such as high-interest shadow financing in China or overseas loans collateralised with domestic assets whose value might be artificially inflated. Officials were worried that in the event of a default, there might be no assets to pay off domestic investors.
Front and centre among those concerns stood Anbang, the bold insurance company that had risen from seemingly nowhere to sixth in the Chinese out-bound mergers and acquisitions league tables in 2016. Anbang had raised money by selling life insurance products that could be considered investment products in disguise (a typical short-dated universal life policy might mature in two to five years).
"They are not a normal company, Anbang," says one senior US insurance executive. "They were untouchable for political reasons, so they could venture into assets and investment practices that were anathema to the industry."
The regulators' argument that shadow banking posed a national risk found an unlikely ally in China's security apparatus. Ordinary people who had lost money in high-interest products have taken to the streets in every province over the past few years. Nothing captures the interest of the Communist party like a mass protest.
Said Jude Blanchette, who researches Chinese politics for The Conference Board:
Getting Xi's attention on economic issues seems a matter of convincing him that they affect his core priority - national security. This is just good old bureaucratic politics 101.
The strategy worked. On Apr 25, Mr Xi told top party leaders that "financial security is an important part of national security and a key foundation for the stable and healthy development of the economy". That has been echoed across the regulatory agencies and even by the minister of public security this summer.
"Financial security became a big issue," says Zhao Xijin, deputy director of the School of Finance at Renmin University, who added:
By this year, there was a perception that it was infringing on national security. It wasn't a question of a particular company because it became a national issue.
WHEN POLITICIANS COME AFTER THE BUSINESSMEN
In 1955, the few capitalists still left in Communist China banged gongs, staged jubilant parades and invited lion dancers to signing ceremonies that handed over to the state a direct share in their businesses, now rebranded as state-private enterprises. The events marked the end of private business in the country for the next quarter of a century.
Six decades later, private companies are still vulnerable to the state's whims. In 2014, a debate at the China Entrepreneur Club featured two of China's wealthiest men.
Liu Chuanzhi, whose Legend Holdings is best known in the west for buying IBM's personal computer business and naming it Lenovo, argued that businessmen in China were safest if they stayed out of politics.
His opponent Wang Shi, founder of China's largest real estate group Vanke, retorted that keeping your head down would not be enough when the politicians come after the businessmen, according to an account of the debate by scholar Cheng Li.
Mr Wang was correct. His company was taken over by a state-backed group in June.
Meanwhile, Mr Liu's long-time associates and business partners are in the state's cross-hairs. Wanda, Fosun and HNA all share connections to Mr Liu as well as to rich investors in Minsheng, China's only sizeable privately owned bank. Their loans and deals with each other provide a web of mutual support in a country that is still structurally hostile to private enterprise.
Now under fire, the entrepreneurs formerly lauded as the face of China's global soft-power push have rushed to embrace the new order. The normally unflappable Wang Jianlin, who has led Wanda into Hollywood, assured Chinese financial magazine Caixin that his company "has decided to keep its main investment within China".
Guo Guangchang, the Fosun chairman who presided over its purchases of Club Med, Cirque de Soleil and a struggling state-owned Portuguese insurer, said in an open letter late last month:
The recent scrutiny on overseas investments and financial irregularities is necessary, timely and can eradicate a lot of irrational investment.
He added: "If we do not take measures, foreigners will see us as 'silly money'."
Smaller players are running for cover. Some private companies have volunteered to take over some of China's most disastrous state-owned firms in order to gain political protection.
"The party gets nervous when too much activity flows outside the SOE (state-owned enterprise) channels," says Arthur Kroeber, managing director at Gavekal Dragonomics, who added
Every so often they need to rein things in, and the people who get hit are the politically incautious ones with a lot of leverage.
REINING IN POTENTIAL CHALLENGERS
The crackdown has a second purpose: Reining in potential challengers to Mr Xi's consolidation of power. This week, leaders and party elders gathered in the seaside resort of Beidaihe to hammer out who will be nominated to top party jobs this autumn, when Mr Xi begins his second term.
Many successful businessmen have built close connections to members of elite Communist party families. Cracking down on private companies deprives these princeling factions of an independent support base and leaves them dependent on Mr Xi's favour if they wish to maintain their status and fortune.
Trusted associates known as "white gloves" who help well-connected families move money out of China are prime targets. One of the most prominent, Xiao Jianhua, was kidnapped from the Four Seasons hotel in Hong Kong by mainland security agents in January, and has not resurfaced.
At the heart of the struggle is Mr Xi's relationship with Wang Qishan, a fellow princeling with an intensely loyal following among financial technocrats. Mr Wang has wielded a four-year anti-corruption drive to purge rival factions on Mr Xi's behalf.
Once financial interests were targeted, the political crossfire became intense. When Mr Xiao was kidnapped in January, Guo Wengui, an exiled businessman with ties to the security apparatus, suddenly appeared in New York, firing accusations of corruption at Mr Wang.
He alleged that Mr Wang's in-laws (a powerful princeling family) benefited from hidden shares in HNA, whose founder worked under Mr Wang in the 1980s. "They are going after us to attack him," one HNA executive confided. But the executive denied that HNA had any untoward contact with Mr Wang.
As Mr Xi embraced the concept of financial risk as a national security issue, Anbang began chiming in on attacks against Mr Wang. But its ties to the Deng family and other influential princelings soon turned into a liability.
Says Victor Shih, a professor at the University of California, San Diego:
Anbang was the one conglomerate clearly tied to political tendencies different than Xi Jinping's.
Two weeks later, bankers leaked the regulators' crackdown on the four big companies and Mr Wang reappeared in state media after a long absence. He criticised corruption in poverty relief projects in Guizhou, where Wanda has a high-profile project.
The message was clear - it was time for private entrepreneurs to start banging the gongs and publicly welcome more "supervision" by the state.
© 2017 The Financial Times Ltd 2017. All rights reserved. Not to be redistributed, copied or modified in any way.