“Madness” was how Wayne Rooney’s former Manchester United teammate Roy Keane described the reports that England’s captain and all-time leading goal scorer was considering a move to the Chinese Super League (CSL) last month.
Keane’s view is that playing in China is a waste of talent and, indeed, the speculation that Rooney might head east would have been laughable even just a year or so ago.
But China’s clubs are suddenly a financial force in the football world. And although the new CSL season starts today, the media had been more focused on what might happen before midnight this past Tuesday, the final day that Chinese clubs were allowed to buy players before matches begin.
The interest makes more sense after an unprecedented spending spree on international stars (see WiC313). Centre-stage was Rooney, on rumours that the 31 year-old would join the cavalcade of stars heading for China for a £30 million ($37 million) fee. Last week he put out a statement that he wouldn’t be leaving Manchester. But the media thinks he might still move in the summer and he seems to have been close enough to signing a contract in China for his agent, Paul Stretford, to travel there to negotiate.
Also making headlines were the suggestion that Arsenal coach Arsene Wenger has just turned down £30 million a year to manage a Chinese team – a salary that would have made him the highest-paid manager in the world.
In fact, the Chinese sports authorities have responded to the football frenzy: last month salary caps and playing restrictions were imposed. It was thanks to these that blockbuster deals dried up in the final phase of the transfer window. Was its intervention a sign that China’s soccer world was coming to its senses and that a madcap bout of spending by CSL clubs has peaked?
Anyway, it seemed timely for WiC – which has been at the vanguard of covering China’s soccer renaissance over the past eight years – to look at just how sustainable the country’s current football boom is.
Top of the table
Clubs from the CSL took over from the English Premier League as the biggest spenders on players for the first time last year and they repeated the feat in this year’s winter transfer window (the main transfer window for Chinese clubs as the CSL starts in March).
Figures from Transfermarkt, an industry website based in Germany, suggest China’s total spend reached £332 million ($407.2 million), a huge jump from about £25 million in 2013 (and more than the £220 million spent by English Premier League clubs in the January window according to Sina Sport).
Football’s money men have been asking how Chinese clubs can afford the spree – not just the transfer fees, but also the sky-high wages for the foreign players.
The short answer is that most teams wouldn’t survive on a self-sustaining basis. China’s football financials are far from transparent, an industry insider told WiC this week, but the numbers didn’t stack up even before the starburst of spending on foreign talent, like the £60 million record paid for Brazilian midfielder Oscar by Shanghai SIPG, or the £600,000 a week in take-home pay for Carlos Tevez, who arrived at Shanghai Shenhua from Boca Juniors.
That hasn’t deterred the clubs from making massive bids for international stars, who have usually found it impossible to resist the money.
“It’s a tantalising sum. [But] Carlos didn’t defraud or trick anyone. He simply accepted an astronomical offer,” explained Diego Maradona, the Argentine great, on the deal for Tevez.
How do the clubs make their money?
China’s leading teams averaged €15-60 million (or $15.77 million to $63 million) in income last season, according to Deloitte, or less than a tenth of Manchester United, the club that heads the most recent money list (for last year’s income).
Hence the challenges in balancing the books on the multi-million pound deals for players like Tevez or Oscar are strikingly apparent.
Attendances at matches have been growing (crowds now average more than 24,000 in China, Deloitte says, similar to Spain) and ticket prices have risen, especially for clubs in the bigger cities. Revenues from sponsorship and co-marketing are still in their infancy, though, even at the most successful clubs like Guangzhou Evergrande, which enraged one partner in a row over shirt sponsorship (see WiC305).
Nor does the addition of the foreign stars seem part of a well-planned path to profit. “We don’t know yet if the premiums that clubs are paying for players are justified and it’s very hard to value them,” Adrian Chen, an executive at the property firm that owns Guangzhou R&F, admitted to the Financial Times last year. “We hope there will be an improvement in game play that will boost ticket and merchandise sales and improve the overall quality of football in China.”
In the meantime, the financial situation has led to warnings that clubs have to control their spending. In total, the People’s Daily calculated that Rmb8 billion ($1.15 billion) was invested last year, an amount that “far exceeded the economic value brought to the league”.
What about broadcasting income?
Like most of the world’s soccer leagues, the key to profitability is the income from media rights. Two years ago Ti’ao Power, a unit of the state-backed investment company China Media Capital (see WiC218), paid Rmb8 billion to purchase five-year of broadcasting rights for the CSL in what was heralded as a coming of age for professional football in China. It wasn’t immediately clear how Ti’ao would earn a return (see WiC302) although it made a start by selling the digital rights to LeSports for two seasons in a deal worth Rmb2.7 billion.
But LeSports is suffering from a cash crunch thanks to overexpansion by its parent firm LeEco (see WiC346) and the South China Morning Post reports this week the Asian Football Confederation has torn up an agreement for LeSports to broadcast its international matches.
There are also reports that LeSports wants to share the digital rights for the second year of its contract for the CSL with PPTV, a subsidiary of Suning, the giant electronics retailer which is also the owner of last year’s soccer runner-up Jiangsu Suning.
PPTV already owns the rights for Spain’s La Liga in China and it is going to stream English Premier League games (for three years from 2019), after paying more than 10 times more for the rights than the previous owner.
Taking control of the CSL would give it a lock on the three most popular competitions in the country, although some still doubt the commercial viability of the plan. “Suning is beyond reason. Regardless of the costs, they will keep investing in football rights,” a senior figure predicted to Yutang Sports.
The income from pay-per-view streaming and subscriptions is going to be crucial for football’s future. The CSL needs to captivate a younger, urban audience that is more comfortable with content on digital devices than traditional television. The goal is to produce a virtuous cycle: the CSL increases its income from media rights, which supports higher spending by clubs and a higher quality league. That encourages more revenues from broadcasting, ticket sales and other sponsorships.
Call up the chairman
If the broadcasting income disappoints, the shortfall has to be met by the businesses that own the clubs, like Suning, Evergrande and Alibaba.
China’s football clubs would be floundering without this financial support, although that’s no different from Japan and Korea, where top teams like the Urawa Reds and Jeonbuk Hyundai Motors are kept going by their corporate owners (Mitsubishi and Hyundai, respectively).
Some of the best teams in the world depend on soccer sugar daddies, like Chelsea, reliant on Roman Abramovich’s cash, and Manchester City, where success has been fuelled with oil money from Abu Dhabi (in fact China Media Capital is another shareholder at the Manchester club, heading a consortium that paid $400 million for a 13% share).
For Abu Dhabi, club ownership is the means of promoting itself and its airline, Etihad (City’s shirt sponsor). For Abramovich at Chelsea, it seems to be simply because he can afford it. The motives of the club owners in China aren’t immediately commercial either (they must know that they aren’t going to make a profit for the foreseeable future) but running a club brings other benefits, including the chance to bolster their relationships with political decisionmakers.
That is said to be one reason for the large number of real estate firms that are club owners: supporting a local team can help developers get what they want from local governments in land sales and planning approvals.
What about the World Cup dream?
Another of the incentives for putting money into the sport is to show willing to the country’s leader Xi Jinping, the pivotal figure in China’s ambitions to create a “great sports nation” (see WiC275) and an accompanying sports industry. Football is a key element of the plan and the blueprint envisages an industry worth Rmb5 trillion by 2025. There is a sense that football could serve as a bellwether for China’s economic transition by encouraging consumer spending and bringing together the worlds of sport, media and entertainment.
Xi’s plan is as much about glory as profit, calling for a prouder future in which China qualifies for the finals of the World Cup (just one appearance so far), hosts one (2030 is the earliest opportunity) and eventually wins one (by a 2050 deadline).
Winning the World Cup looks implausible to many pundits today because the Chinese are ranked 86th in the world. Supporters of the influx of foreign stars say they will help to raise standards in the domestic league, with spillover benefits for the national side. But opponents demur, worried that local players will be crowded out of the best teams.
The Chinese Football Association (CFA) seems to agree, stipulating suddenly this month that teams can field no more than three non-Chinese players on the pitch at one time, down from four in the previous rules. Clubs also have to play at least one local under the age of 23 in their starting line-ups and there is a complete ban on foreign goalkeepers.
The directive has had a dampening effect on transfer activity as most teams have filled their international quota and they don’t want their expensive foreign stars to sit on the substitutes bench.
This sense of a sport in a state of flux extends to the boardroom as more clubs change hands. Contradictions abound. Although football is now subject to a government-directed strategy of improvement, state enterprises are under instructions to exit their club ownerships. In the latest deal Citic has sold most of its stake in Beijing Guoan to Sinobo Land, another real estate firm. That’s a good thing as far as the local media is concerned. “State firms effectively spend taxpayers’ money and this is hardly a stable model for a successful football team, especially when results on the pitch go wrong,” says Tencent Sport.
If the policy is properly implemented there will need to be more divestments: Shandong Luneng has the State Grid, the largest electricity company in the world, as a shareholder, while Shanghai SIPG is backed by the city’s state-owned port operator. But the sale of Beijing Guoan has also highlighted that the crazy prices extend as much to China’s teams as the players themselves. The investment valued Guoan at more than $800 million – or more than Chinese investors paid for AC Milan last year. And it isn’t even the most valuable franchise in the league – an honour bestowed on Guangzhou Evergrande, based on off-market trading in its shares (see WiC289).
The conundrum is that multi-million dollar sums are being paid for teams that have been blasted for their unsustainable business models. The government’s General Administration of Sport condemned the CSL in January, for instance, warning that it would be clamping down on excessive salaries, signing fees and under-the-table contracts. It has warned teams to stop “burning money” on “irrational” purchases. “We must take building 100-year clubs as the goal,” its spokesman insisted, threatening that “seriously insolvent clubs” would be dumped out of the league.
Going for the grassroots
In defence of the supercharged spending, at least the tycoons are putting more of their money into the game inside China. That follows a period in which more of the investment was made overseas at clubs like AC Milan and Inter in Italy (see WiC328) and English clubs vying for promotion to the Premier League (see WiC337).
But critics say that there is too much spending at the top of football’s pyramid.
The message that football needs to go grassroots has been getting through. Even Evergrande’s co-owner Xu Jiayin (the tycoon who kicked off the boom; see WiC116) has been parroting it by promising his will be an “all-Chinese squad” within three years. That’s a change of heart for a man whose team has won the league for the last six seasons with a squad led by international players.
“Our investment in introducing foreign players was relatively big,” Xu now admits. “Starting next year, our investment should focus on youth training.” (Actually, three years ago Xu had already opened a vast Chinese football school that has been likened to a ‘soccer Hogwarts’; see WiC196).
Another part of the plan: embedding football in the national curriculum (teaching it in at least 50,000 schools by 2025) and the Chinese Football Association says it will double its spending on the grassroots over the next 12 months, allocating more than Rmb200 million to training and youth development.
All the same, that youth budget is less than Carlos Tevez’s yearly wage in Shanghai, and China won’t be able to cultivate a generation of homegrown stars overnight. Studies of the junior levels of the game show a much smaller proportion of kids playing football than in other countries and cultural change is going to be crucial in convincing tiger parents that sport is a worthwhile part of education.
Maybe all the news about the superstar salaries might get a few more parents interested. But what would help most is for China to produce world-class players of its own. Here football bosses are hoping for their own version of the “Yao Ming effect” – the basketball star credited with a surge in popularity for the NBA in China. Yao is still China’s best-known sports star, despite retiring long ago (he was appointed the president of the Chinese Basketball Association last month). None of the foreign footballers will come close to generating the same sense of adulation, but a local superstar would be a game-changer.
In the meantime, the watchword is more likely to be patience. That’s a situation that might not apply for many of the foreign superstars, including Carlos Tevez, if the Argentine newspaper Olé is to be believed. Supposedly, he is already unhappy in Shanghai, only a couple of months into his contract. His agent has hotly denied that the player is already agitating to leave.
Of course, the rumour mill continues to grind about Rooney as well. Sky News reported on Thursday that he is now in talks to move to his former club Everton this summer, stating the 31 year-old may make an emotional rather than a purely financial decision.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.