Chinese capital and English football
That the state of the domestic Chinese economy is no longer something Western Europe is able to pass by seems obvious, amid all the ink spilt over the growing ambiguity of the Continent’s relationship with Xi Jinping’s government. While Germany and France pass over their former ties to Russia and President Putin, neither Olaf Scholz nor Emmanuel Macron have been overly shy in displaying their acknowledgement of the necessity in maintaining strong economic links with China and diplomatic ties with Beijing, even in the face of increased American hostility.
China’s immense expansion and the creation of a burgeoning middle class is one of the greatest and fastest economic miracles in world history. In Britain, it has led to increased foreign investment in private secondary education and increased competition for places in higher education. It has also led to increased investment in the industries that are not so easily associated with the work ethic to which Niall Ferguson attributes China’s extraordinary growth: television and entertainment, indulgence in real estate, and sport.
Yet the Chinese economy is in a weaker position than many expected. Its ill-directed lockdown policy has long-term ramifications, but the growing conflict with the United States around the Indo-Pacific has begun to impact even the most far-flung Chinese enterprises. Beijing, in short, is keen to peg back the remnants of the “Golden Age” of investment in Europe, as its firm insistence on capital controls, even at the expense of the renminbi miniscule reserve currency status, underlines. In the recent history of British football therefore lie a number of brutal examples of what this homeward capital flow looks like.
Dai Yongge was one of many business beneficiaries of China’s growing consumer economy and rising middle class in the late 1990s and early 2000s. China was affected not too badly by the Asian Financial Crisis of 1997, and Mr Dai’s sister, Hawken Xiu Li, highlighted just the kind of diverse entrepreneurial spirit of the era. Her business focused on taking state-owned air raid shelters and transforming them into shopping malls. Renhe Commercial Holdings built up its investments to twenty-three such malls by 2016, amassing huge profits in the growth of a consumer society. Ms Hawken was once listed by Forbes as one of the world’s richest women, in an era where Chinese GDP rose from a fifth of that of the United States to half between 2006 and 2010.
In 2017, she decided to give a 48% stake of the company over to her brother, dropping off the Forbes list of billionaires in the process. Mr Dai shared two aspirations common among successful Chinese businessmen. Firstly, he wanted to get his money outside of the control of the Chinese state, and into foreign investments which he knew were truly beyond the strictures of capital controls at home. Given his by now significant wealth — the shares given by his sister were worth HK$3.74 billion — Mr Dai knew that even if he lost money on a foreign investment, he would have nevertheless been able to keep anything left in tax-light and foreign markets free from state interference. As Ferguson, Ray Dalio and many others have argued over the last three decades, the absence of the rule of law and true private property rights is turning out to be a huge hindrance to China’s economic and political stability. The increasingly strict financial regime of the last few years has only extended such fears among its very richest.
Secondly, Mr Dai had a passionate love of football, and it was here that his interests clashed once more with those of Xi Jinping. The Chinese President has unleashed an ambitious plan to boost China’s footballing standards by 2050 from their relatively abysmal state. Investment in domestic leagues, huge price offers to foreign players and an increased presence in the European game have been central to achieving those gains. The coffers of West Bromwich Albion, Wolverhampton Wanderers and Manchester City have all been gratefully filled with Chinese cash over the last decade. Mr Dai wanted to secure his cash outside of Asia, and to get a part in the world of transfer deals, Directors’ Boxes and the cultural capital of European football.
He did not pick particularly glamorous places to fulfil his desires. A plan to take over Hull City was seen to be secure in 2016, but fell through at the last minute. The buying of a Premier League football club is no small undertaking, and the League’s investigators continue to go through fairly rigorous, if controversial, procedures when deciding whether the owners will be able to maintain the sheer financial baggage of the sport in the twenty-first century.
Mr Dai did not pass this test in 2016. Worse, the investigators essentially suggested that he was a poor businessman running a large company beset by inherently bad systems of corporate management. “Red flags” were raised over his corporate acumen and ability to keep the cash flowing. The evidence for this was clear: the credit ratings of S&P and Moody’s had been consistently deteriorating for Renhe Commercial Holdings, especially after it failed to keep to its covenant on a syndicated loan of $300 million and failed to sell its malls in 2015. The year before, S&P had downgraded the company to a very low “CC” rating with a “negative outlook”, further highlighting a “lack of sales, consecutive losses and a weak liquidity problem”. Mr Dai’s son had taken a senior place in the business, aged only 23. The family’s tight grip on the business only seemed to add to its problems.
Mr Dai, however, was undeterred. He still commanded vast assets, as well as a large mansion overlooking Sydney Harbour from the luxurious Rose Bay, which he sold for $25 million this year. Indeed, his footballing dream had been fulfilled to some extent since 2007, when he acquired (with his sister) the club that became Beijing Renhe, a mediocre team which was ultimately dissolved in 2021 after stalling in the country’s second division. In 2017, the two got hold of a substantial stake in the Belgian second division side KSV Roeselare, but in 2019 Ms Hawken let go of her share just before that club declared bankruptcy and quickly folded. In the same year as this brief venture into obscure Belgian football, Mr Dai took a bigger plunge into another English team, and was given permission by the English Football League to take a majority share in Reading, who occupied a solid spot near the top of the Championship League, the country’s second tier.
Beyond an affinity for the game and a desire to get large amounts of cash outside of his home country, Mr Dai had another reason for investing in such clubs as Beijing, Roeselare and Reading. They were all hoping for promotion to their respective top divisions; for Reading, the prospect of the Premier League would bring around £100 million in broadcasting income alone, accepting the huge impact of exposure and growth in the supporter base. Reading had come excruciatingly close to taking that cheque in 2017, when they lost on penalties to Huddersfield Town at Wembley. It is not for nothing that the annual Championship play-off final is said to be the “£1 billion game”.
Reading got there by playing stolid, defensive football under the Dutch model of manager Jaap Stam. Their Madejski Stadium, named after their transformative former chairman, had been marked for extension by Anton Zingarevich, the son of businessmen Boris, the latter a Russian billionaire and his son an avid football fan. The young Zingarevich took control of the club in 2012, as it was promoted to the Premier League for the second time. Only a short time later, Reading suffered relegation and Zingarevich left to wreak similar havoc at the Bulgarian team Botev Plovdiv. Zingarevich was later prosecuted by the Russian government for embezzlement and recently blacklisted by the Ukrainian government for his links to the regime. With Madejski low on cash after the financial crisis and having expended much of what was left on “the Royals”, the club was facing a financial disaster, exacerbated by Chris Samuelson, who managed a number of tax-light cash deals in British football over the last decade.
The club was saved by a new deal with a Thai consortium, eager to gain access to the good deal of real estate which surrounded the ground. This they bought, before realising that the football club, just as for Zingarevich, was lucrative only for as long as success reigned on the pitch; although the club took to the top end of the Championship table, promotion remained elusive. In 2017, the Thais sold the club to Mr Dai.
The plight of Reading is a classic tale of financial mismanagement and credulous investors. The Club had sold off its surrounding real estate to the Thai consortium for a meagre price, before realising that this was the ultimate goal of their owners. Precisely the same happened under Dai, with the stadium sold off to the Club’s new owner; it now takes the unglamorous name of a local firm in being the “Select Car Leasing Stadium”.
Reports suggest that the Dais have ploughed around £250 million into Reading. They have got little out of it so far, with fans reporting a long list of unsustainable transfers of ex-Premier League players, with contracts signed without suitable exit clauses. When the Club realised it could no longer afford their extortionate pay packets, it sold them on to others for relatively meagre prices. The cycle continued, as its fortunes deteriorated on and off the pitch.
Two transfer embargoes have been placed on Reading this year, before HMRC issued a winding-up petition at the end of June. In 2021, the club was spending 234% of its revenue on player wages, while pre-tax losses of £146 million had accumulated over the last five years, well in excess of the English Football League’s £13 million limit. Fans are obviously eager for Dai to sell up, but he is not. The reason is clear: if Dai sells the Club now, it will go for a much smaller price than that for which he bought it six years ago. But the issues are greater than that.
The Communist Party in China has long been frightened at the possibilities of “capital flight”, of huge quantities of cash exiting China and being reinvested in the West. The problem worsens when the money is invested in unprofitable and unsustainable enterprises, weakening the strength of the financial systems at home. Whereas once investment in foreign football was a means of ramping up Xi Jinping’s World Cup aspirations, it is now being urgently reduced. The lesson of the Asian Financial Crisis, which hit Thailand and Malaysia so hard, was that excess capital flight was at the root of collapse for faltering financial systems. When China’s miraculous period of growth started to falter in 2016, the government became increasingly aware of money flying out of the country. Fickle billionaires like the Dais investing in poorly managed organisations such as football clubs would always be first to feel the pressure.
The Dais still maintain heavy interests in China. The failure of Renhe Commercial Holdings must have hit hard, as the company’s website has seen no activity since 2019. Instead, the Dais have invested in a new industry, albeit with what look to be no less mismanaged results. The China Dili Group operates ten Chinese wholesale markets, an industry close to the heart of a state which is notoriously obsessed with food security issues. It seems as though Mr Dai has given up his place on the Board of the Company, however, after onshore litigation charges were brought by a Chinese bank after loan repayments were due. According to the company’s records, the loans amounted to RMB 1,150 million, equivalent to more than £125 million. Dai tried to square the investigation by insisting that the loans were to subsidiary companies under the control of a close acquaintance, rather than himself. Yet the Company was later ordered to suspend trading on the Hong Kong Stock Exchange, and to issue a number of internal investigations. The central bank, the People’s Bank of China, has clearly been involved in the case.
Such mismanagement in China will no doubt have been one reason for Dai’s failure to extract enough money from China to England to play his Club’s players and staff. He is clearly a poor businessman, but the story of wealthy Chinese being pursued by their home government when abroad is not a new one. Across Europe, Chinese investment in football has declined under state pressure, and those left in between are merely to be the victims of the occluded intrigues of state and finance while China remains nominally open for foreign business. While the management consultancy Deloittes long maintained an office offering advice for Chinese sports investors, it now seems to have been closed.
The whole tale at Reading is not an original one: clubs looking for promotion to the Premier League such as Derby County, Nottingham Forest and Reading frequently change hands with the opportunity so high and the sustained success so uncommon. What the story at Reading reveals, however, is a wider exit from the scene of European sporting investment by Chinese financiers. The main reason for such a swift divergence from the seemingly unstoppable path of billionaire involvement in sports is clearly the economic revanchism of the Chinese Communist Party and its attempts to banish the spectre of capital flight. Football clubs and other such unprofitable ventures are the first victims of the state-enforced rollback. While a number of MPs, including Theresa May, have sounded the alarm about the future of Reading, the Government is ultimately powerless to stop the necessary flow of cash between potentially dubious foreign investors and the extortionate cash cows of British football. Demands for regulation or support inevitably come up against the same moral quandaries that arise from the growth of the importance of the Indo-Pacific and the economic stagnation of Western Europe.
In a wide-ranging investigation, the writer James Meek highlighted the same type of quandary in the fate of British offshore wind farming and the Vietnamese companies securing it. While we may doubt the standards and regulations of the labour force and the financial dealings, it is ultimately on the consistent flow of cash from successful ventures in the region that British industry depends. Vietnam, for example, recently passed the United Kingdom as the seventh-largest trading partner of the United States. The countries which Jared Cohen recently described as the “geopolitical swing states” of the twenty-first century will increasingly determine the attitude that China has to its capital flows. The football investors from China of the last two decades may well become the Indian, Vietnamese and Filipino investors of the next two. Saudi Arabian capital has already made significant inroads into the British sports system.
The losers of this economic and geopolitical game are the fans of British football, and indeed the structures of the clubs which have endured unpaid bills and the financial roulette of unsustainable business plans and half-hearted investors. The issue becomes broader when the interests of the Chinese state become involved: the bargaining power of pure cash, which often suffices in the West and the Middle East, is still not as important in the political world of the PRC. As one China-based journalist told the Financial Times, what has happened in football is “typical China”. A succession of green lights are followed by a barrage of red, and what follows is a kind of “yellow”. It won’t only be the football industry that will wait to see what that yellow light really means for the West in the next decade.
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