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Politics will decide whether Evergrande can hit jackpot

Hui Ka-yan and his tycoon buddies from Hong Kong love to play “purge the landlord”, the Chinese version of the poker game. For years, it has been a monthly game. The challenge is in winning without holding the top cards.

The “gang” is probably experiencing the same thrill in their relatively small and late bet on China Vanke. Given China’s twisted economic conditions, they are holding an unbeatable hand.

It does not really matter whether they win control for Vanke, the country’s largest developer, in the end as some have expected.

Evergrande Group’s interest in Vanke is no secret within the industry. It will get much-needed prime asset, low leverage and creditworthiness from the latter.

Hui was given the chance when Vanke’s management did everything possible to push the share price down by 20 per cent in order to put a financial squeeze on Baoneng Group, which has acquired Vanke with a loan.

Evergrande has bought 6.82 per cent of Vanke. His card game partners – New World Development’s Cheng Yu-tung family and Yugang International chairman Cheung Chung-kiu – are believed to have soaked up 1.2 per cent at the same time.

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The gang may be able to acquire a few percentage more, but the climb to control is steep. The control battle has largely dried up the free float of Vanke. Baoneng is not allowed to sell its 25 per cent stake within a year under Chinese regulations. China Resources won’t sell its 15 per cent stake.

Then there is politics. A marriage between Vanke and Evergrande will produce a private developer too huge and dominating for Beijing to feel comfortable with. The government can tolerate Baoneng taking over Vanke, but Evergrande is much bigger in size and influence.

A political animal like Hui should know what too big to be trusted means in China’s corridor of power. Partnering with China Resources is the only possible way to victory. Simply imagine a strategic cooperation agreement between the two.

China Resources is not ready to increase its stake in Vanke. Yet Baoneng, which has a limited track record in the industry, is only a convenient partner for the state conglomerate to shut out Wang Shi, Vanke’s chairman.

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If Hui’s gang raises its stake to more than 10 per cent, an alliance with China Resources will mean more than 25 per cent control, dwarfing Baoneng.

The question is whether Hui can convince Beijing that he is trustworthy politically. After all, he is a private entrepreneur, not a proxy of senior officials. He should be pulling every possible string now.

The beauty of the deal is that even if it doesn’t work out, the gang is still on the winning side.

Property is the synonym of prime asset in China, thanks to its knotty economy and interventionist government.

While liquidity is ample, investment opportunity is rare. Sluggish consumption has ruled out investing in real business. The stock market is not going anywhere and won’t be for sometime. Its regulator has closed its two-year-old department of renovation; shelved a plan to allow public offerings by registration instead of approval; and switched off the cooking of a bourse for the listing of established internet companies.

Investing overseas used to be a way out but not anymore. In their defence of the yuan, the regulators are putting every yuan exit under microscope. Foreign investments are now only for the privileged few.

Real estate is the magnet. When a small piece of land in Shanghai’s city centre is sold at 11 billion yuan, their 16 billion yuan investment in Vanke is cheap.

The Vanke stake is liquid. It helps the balance sheet, bringing in more leverage, liquidity and investment opportunities to Evergrande. Freaked-out bankers are lending only to bricks-and-mortar business nowadays.

What is even better is Vanke’s price would go up the minute Evergrande’s purchase were announced, given the expectation of a control battle.

Evergrande is sitting on a five billion yuan book profit from the Vanke bet, compared to its 2014 earnings of 10 billion yuan. Another fringe benefit is the reputation of a top hunter, which works as a key multiplier in China’s asset game.

All of these are betting on one thing – Beijing dare not cool the hot real estate market, which is the only engine it has. So does everyone else.