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Dalian Wanda's assets transfer: An opportunity or a crisis?

The recent jaw-dropping sale of Dalian Wanda Group's leisure properties to two domestic property developers has made a big splash in the Chinese property industry, causing a heated debate about whether the deal marks a step closer to its asset-light operation or a suspension of its ambitious international expansion, as the country's banks have been required to stop lending to the property conglomerate for overseas acquisitions.

The $9.4 billion deal, which includes the sale of 91 percent equity in 13 tourism projects and 77 hotels to Sunac China and Guangzhou R&F Properties, is widely seen as a part of Wanda Group's transformation to the asset-light operation, a landmark plan launched in 2015 to transfer property ownership to investors, with the group being responsible for brand management and operation. Wanda Group believes that the asset-light operation can help yield more profits than asset-heavy model.

Wanda Group would speed up its transformation to the asset-light business model after the deal is completed, billionaire Wang Jianlin, the company's chairman, said in a statement last week in response to questions raised by Caixin, a business media outlet in China. Wang noted that the assets transfer would contribute to the creation of two asset-light business subsidiaries - a hotel management company and a culture and tourism project management company - which he said can make money by means of brand management and rental income.

Some titanic Chinese real estate developers including China Vanke and Soho China have adopted a similar asset-light policy over the past two years to reduce pressure from the fierce fluctuations of property prices in the country.

The deal would also greatly reduce the debt level of Dalian Wanda Commercial Properties (DWCP), a subsidiary of Wanda Group, which delisted from the Hong Kong stock exchange last year and is seeking a relisting on the bourse in Shanghai.

A debt cut may make it easier for DWCP to get regulatory approval to trade equities in the Chinese mainland, where the authorities are keeping an eye on Wanda Group's borrowings from the Chinese lenders, which presents systematic risks to the country's banking system. The Chinese regulators are likely to call a halt to DWCP's initial public offering (IPO) in Shanghai if its debt level is too high, according to media reports.

Wang has announced that Wanda Group plans to clear all of its debts in the next three years in show of his determination to deleverage. The move coincides with China's current property industry policy which sees deleveraging and inventory reduction as top priorities.

However, some analysts said that the debt levels at Wanda Group's listed subsidiaries, which do publish audited financial statements, were not unusually high.

In June, China's banking regulator required domestic banks to assess the systematic risks presented by some big enterprises involved in overseas buying spree, with Wanda Group's six foreign investment projects including the acquisition of Legendary Entertainment last year and the buyout of AMC Entertainment in 2012 being under scrutiny. Chinese banks have also been ordered to stop making loans for the six overseas acquisitions, media reports said.

In last week's statement sent to Caixin, Wang changed his tone by saying that Wanda Group "will follow the national call and has decided to keep its major investments in China". It appears to go against the billionaire's plan to build its property company into a global business empire, a goal that could be largely reached by overseas investment and acquisition. Some analysts said that Wang's turnaround might be a makeshift strategy that he adopts in reaction to the government's tightened control on overseas acquisition due to concerns over capital outflow.

Recently, the National Development and Reform Commission (NDRC), China's top economic planner, said that the government would continue to closely watch the irrational investment in overseas property, hotel, entertainment and sports sectors in an attempt to reduce the potential financial risks, with some experts from the state-backed think tanks explicitly saying that some domestic companies which borrow money to buy overseas assets might harbor ulterior motives of capital transfer and money laundering.

In a previous interview with the Financial Times, Wang admitted that he did not want Wanda Group to be an unruly enterprise in China as the government's policy had changed even though it could raise funds overseas on its own. That might be an answer to Wanda Group's asset sale and its retreat from overseas investment craze.

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