Just Another Foreign Asset: Why Chinese Buy Up European Soccer Clubs

Some say it's politics, but it may be about money after all
July 29, 2016 Updated: August 8, 2016    

News Analysis

Yes, China has the official goal of becoming a leading power in world soccer by 2050, according to a policy document issued in March 2015. 

As is the case with any kind of policy directive in China, this leads to overpricing and malinvestment. Why else would Shanghai SIPG pay $61.4 million for the less-than-average Brazilian player Givanildo Vieira de Sousa, also known as Hulk? Remember his non-performance at the World Cup in Brazil 2014?

To get an idea of how large a price Shanghai SIPG paid, consider the cost of the most expensive Chinese national. Zhang Linpeng, who plays for Guangzhou Evergrande Taobao, is only worth $1.3 million, according to Germany-based soccer website Transfermarkt.com.

And why else would Chinese appliance and car manufacturers buy entire European soccer clubs? It may not be just the policy directive. This may be a win-win in terms of both politics and economics for the Chinese. 

The most valuable Chinese Super League 11, all prices in euros. (Transfermarkt.com)
The most valuable Chinese Super League 11, all prices in euros. (Transfermarkt.com)

First, it’s an easy way for these companies to funnel money out of the country. Chinese companies are buying up everything that is not bolted down, bidding for $119 billion worth of foreign companies in the first five months of 2016 alone.

Second, it is true that Chinese leader Xi Jinping is personally pushing the initiative. So everyone who is tagging along wins some brownie points and gets to increase their foreign asset holdings at a time when the Chinese economy is slowing and the currency may devalue at any moment.

The numbers are small in comparison, but nonetheless remarkable. Since 2014, Chinese firms in real estate, retail, manufacturing, as well as energy have invested $1 billion in 10 European soccer clubs like Manchester City and Internationale Milano.

Other deals, like GSR Capital’s proposed $825 million deal to take over AC Milan, and Fosun International’s $59 million confirmed takeover of England’s Wolverhampton Wanderers, would almost double that figure.

Players

As for players, the Chinese Super League spent $145 million on players this year and a whopping $443 million during last year’s transfer windows, according to data supplied by Transfermarkt.com.

Hulk is the most valuable player, and other notable transfers include Colombian forward Jackson Martinez ($46 million) from Atletico Madrid and Chelsea’s Ramirez ($31 million).  

Despite the $600 million spent, however, Transfermarkt.com only values all of the Chinese Super League’s players at $360 million and the league pulls in a mere $200 million in TV revenues for five years. So the Chinese companies and super-rich behind the clubs have to fill in the gap in revenues (wages cost money too), which they gladly do.

Chinese companies and investors have a reputation for overpaying for anything from Vancouver real estate to Australian wineries, but why?

If the assessment of hedge fund managers like Kyle Bass is true, holding Chinese bank deposits may result in higher losses than overpaying for a European soccer club or a Brazilian player.  

He thinks China will face a banking crisis and a devaluation of the currency: “It’s going to cost them 30 percent of GDP. Loss, given defaults, will be more than 80 percent. They are going to lose $3 trillion in bank capital, they only have $2 trillion in there,” he said in an interview with RealVisionTV.

If his scenario holds true, a diversified portfolio of gold, bitcoin, Vancouver real estate, and some soccer players should weather the storm.