Chinese Character

Running for cover

Top regulator falls foul of graft police in insurance sector shake-out

Xiang-Junbo-w

Xiang Junbo: detained by anti-corruption investigators

Maurice R Greenberg is a veteran of D-Day and a recipient of a Bronze Star for his service during the Korean War. A qualified lawyer, Greenberg chose to start his business career in insurance after he left the military. He was appointed as CEO of AIG in 1967 and held on to the role for almost 40 years, becoming the most influential figure in the business.

“Hank” even helped China’s insurance market to develop, visiting Beijing almost every year since 1975, when AIG signed a reinsurance deal with the People’s Insurance Company of China (the country’s sole insurer at the time and the predecessor of state giants China Life Insurance and PICC). In 1992 the persistence paid off and AIG was the first foreign insurer granted a licence to operate in Shanghai. In doing so, Greenberg brought a competitive, commission-based reward system – a radical idea for China’s state-owned firms where salespeople had the same fixed salaries.

Until this week, Xiang Junbo had a claim to be China’s Greenberg equivalent. Since becoming the Party boss and chairman of the China Insurance Regulatory Commission (CIRC) in 2011, the 60 year-old has been arguably the most powerful figure in the sector. Even his career path has similarities to his American peer: Xiang is also a law school graduate and a former army officer. However, Xiang and Greenberg are unlikely to cross paths when AIG celebrates its 100th anniversary in China in two years time because Xiang has just been removed from his post for suspected “serious violation of Party discipline”. The surprise announcement made him the highest-ranking cadre in the financial sector to be apprehended by Xi Jinping’s anti-graft campaign and the attention now turns to whether the sacking is going to weigh on China’s fast-growing insurance sector, home to acquisitive bidders such as Anbang (the firm that purchased the Waldorf Astoria in New York).

Xiang was born in 1957 in Chongqing. Apart from the fact that his father was a “university professor”, information on his family background has been scarce in the Chinese media (which suggests the Chongqing native is not one of the princelings from the country’s powerful political clans).

It seems instead that Xiang belonged to the elite group of financial technocrats who climbed the ranks with their impressive résumés. Xiang first joined the Communist Party in 1974, according to China News Weekly, a magazine published by the state-run China News Service. His initial career began in the military. When Deng Xiaoping ushered in his economic reforms in 1978, Xiang was working as a secretary at a command unit of the People’s Liberation Army in Chengdu. Rather then starting his own business, as many future Chinese tycoons chose to do, Xiang headed for the frontline of China’s border war with Vietnam in 1979. As the political commissar of his platoon, he was involved in combat and injured his leg during a battle.

After the conflict was over, Xiang could have gone straight to the PLA’s military school but he picked a different path. This time he joined the highly competitive college entrance exams (which had just resumed after the Cultural Revolution) and Xiang was accepted by Renmin University of China, where he wanted to study Chinese literature. After his father intervened he chose finance instead (Xiang also got a doctorate degree in law from Peking University in 1998) and majored in auditing. In 1985 he joined the National Audit Office and spent the next 20 years as an auditor tracking down public finance frauds. “I’ve joined the PLA, fought a war and injured myself. I’ve seen it all. Is that the best you could do?” Xiang once bravely told gangsters threatening his family when he was investigating a major case in Tianjin in 1999, according to China News Weekly.

This experience – plus his love for literature – saw Xiang also emerge as a writer. Using the pseudonym “Pure Steel”, he has published a number of novels and some of them have been adapted into TV dramas. For instance, China News Weekly says that Audit Report, a TV series about a corruption scandal, is based on Xiang’s experience in Tianjin. “Xiang’s fearless crackdown on graft has made his downfall more surprising and ironic,” it concluded (and awkwardly timed too – In the Name of the People, an anti-graft series has been grabbing television audiences nationwide).

In 2004, Xiang was promoted and became a banking regulator, first joining the People’s Bank of China and later serving as boss of Agricultural Bank of China. As the last of the “Big Four” state lenders to be privatised, Agricultural Bank was sitting on a bad loan ratio of 23% by the end of 2006. After assuming office, Xiang unleashed an “auditing storm” across the bank and brought down the bad debt levels to 3% by 2009. A year later, he would steer Agricultural Bank to a $20 billion listing, then the world’s biggest IPO.

In late 2011, Xiang was promoted again, this time to head the CIRC. Sales growth of new insurance polices had declined for the first time since 1979, and many smaller insurers were facing a liquidity crunch. Xiang spearheaded policies to ease investment restrictions for the insurers, including lifting the investment caps on funds they were permitted to put into real estate and equities. Perhaps most importantly, insurers were also allowed to raise capital by selling so-called “universal insurance products”, Caixin Weekly notes, which are effectively more risky structured investments.

CIRC data showed that assets held by insurers nearly tripled from Rmb6 trillion ($870 billion) in 2011 to nearly Rmb16 trillion by February 2017. (Premiums from universal insurance policies also exceeded Rmb1.18 trillion by the end of 2016, up from Rmb133 billion in February 2015). And as CIRC boss, Xiang has overseen the rise of some newly powerful companies, many of which have become major forces in blockbuster M&A deals, including Anbang (see WiC319) and Baoneng, which had sought to take over leading Chinese developer Vanke (see WiC308).

What has Xiang done wrong? According to Caixin Weekly, his downfall is linked to a dubious Rmb3.2 billion loan extended by Agricultural Bank to Guo Wengui, a fugitive tycoon thought to be the bagman for Ma Jian, the disgraced former deputy head of the state security ministry (the allegation was soon taken down from the magazine’s website). Reportedly Guo is one of the “big crocodiles” that the central government has vowed to hunt down (see WiC354). In the meantime he is making a major nuisance of himself in the United States, putting out all kinds of allegations about senior members of the Chinese political elite. Interpol has just issued a ‘red notice’ for his arrest at Beijing’s request.

Earlier this year Xiang told a press conference in Beijing that he “would never allow the insurance industry to be turned into a sanctuary or war chest of corporate raiders, buyout artists and so-called ‘financial crocodiles’ ”. He now finds himself as a target of the clean-up campaign as the five-year boom in the industry runs into regulatory headwinds. Last month Baoneng’s Foresea Insurance and China Evergrande’s insurance arm were singled out for punishment, with regulators describing their attempts to amass stakes in listed firms as the work of “barbarians and demons” (see WiC356). In February the owner of Sino Life was taken away by corruption investigators, while Xiao Jianhua, who controls Huaxia Life, was nabbed from Hong Kong’s Four Seasons Hotel and spirited back into China (see WiC354).

Xiang’s downfall could ­herald further arrests in the clean-up campaign, the media has speculated, with a social media ­account run by the People’s Daily claiming that “a more ­exciting show” would ­follow.

At the very least the insurers will suffer from much stricter fundraising rules, Sina Finance predicts, and the buccaneering behaviour of the last few years looks set to be curtailed. “All of them say they aspire to become China’s answer to Berkshire Hathaway,” the news portal writes. “But in fact they have been acting like AIG in 2008 [selling structured financial products to raise funds for riskier investments].”

So, another parallel for Xiang and Greenberg? The 91 year-old American has been battling for his own legacy, after what The Economist termed an “epic law suit” with the State of New York over “contested transactions” during his time with AIG.

In February Greenberg settled the case, paying a fine of $9 million but denying any wrongdoing. Xiang Junbo will struggle to secure a similar outcome.


© ChinTell Ltd. All rights reserved.

Brought to you 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.