About 20 years ago, amid the bursting of an asset bubble, the Japanese government injected a huge amount of taxpayer money into a slew of troubled banks and brokerages. Some firms were temporarily nationalised. Chiyoda Mutual, the most leveraged insurer, imploded and was later bailed out by AIG.
The American giant then found itself in trouble in 2008 and was put under the temporary control of the Federal Reserve following an $85 billion bailout.
Anbang Insurance has sometimes been compared to AIG because of its size and entanglement with the wider Chinese financial system. Fuelled by funds raised from the sale of often-inscrutable financial products, it went on a dazzling shopping spree overseas, gobbling up trophy assets such as New York’s Waldorf Astoria.
That drew comparisons with the acquisitive Japanese firms of the 1980s, which had gorged on assets from the Rockefeller Center to Columbia Pictures. And given the similarities, perhaps it is fitting that China’s second largest insurer by assets has now been forced into state wardship.
What has happened?
Anbang’s chairman and key shareholder Wu Xiaohui had been under investigation since June last year (see WiC371), so it was less of surprise when the China Insurance Regulatory Commission finally confirmed on February 23 that the 52 year-old had been removed from his post.
In its statement, the regulator said it would also be taking over at Anbang for a year while Wu faces prosecution for economic crimes.
“Illegal business practices by Anbang Insurance Group may seriously threaten the solvency of the company,” the CIRC warned.
The country’s insurance laws stipulate that an insurer can be taken over by regulators if there is a risk of insolvency, or illegal activity that is damaging the public interest. The CIRC has put two regional insurers under temporary supervision under these terms in the past 11 years, although the seizure of Anbang is unprecedented given its size and status, as well as its identity as a private sector firm.
A 31-member taskforce comprising officials from the CIRC, the central bank, the State Administration of Foreign Exchange and other financial regulators will now replace Anbang’s board of directors to maintain its “normal and stable operations”.
The high-level working group has the power to audit Anbang’s books and clean up its debts, including selling off its riskiest assets.
Perhaps most importantly, the CIRC said it will “actively look for and introduce good quality social capital [aka new investors] to restructure the company”.
The regulator insists that Anbang won’t be nationalised permanently, staying as a “private-sector firm”. However, if the shareholding restructuring runs into difficulties the temporary nationalisation could be extended for another year.
What has Wu done wrong?
On the same day that Anbang was taken into state control a Shanghai court announced that prosecutors had filed a lawsuit against Wu, accusing him of fundraising fraud and embezzlement.
There is no sign yet whether Wu’s crimes are related to former CIRC chairman Xiang Junbo, who was arrested on allegations of corruption in April last year. But looking at how events have unfolded some correlation seems feasible.
Almost immediately after Xiang’s detention, Anbang was told by the CIRC to stop selling its wealth management products, a crucial source of funding for its global M&A activities. Simultaneously rumours spread that Deng Xiaoping’s granddaughter Zhuo Ran had divorced Wu, depriving him of his political air cover.
In the same month, and in a public relations balancing act typically Chinese in style, Wu conducted an interview with Beijing News, a newspaper run by the Beijing municipal government’s propaganda department. In this rare media appearance, the elusive tycoon professed his staunch support for Xi Jinping’s Belt and Road Initiative. “Anbang has not used a single penny of state money to invest overseas,” he also made clear to the interviewer.
Wu was detained just over a month later. In the same week, regulators ordered the banks to reassess the credit risks on their loan portfolios and told them to stop lending to “some large enterprises” which had been active in overseas M&A. (Xinhua reported last week that the CIRC has had teams at Anbang conducting checks and supervising operations since last June.)
A fire sale at Anbang too?
As we noted in earlier issues of WiC, some of the ultra acquisitive firms, including property major Wanda and aviation conglomerate HNA, have since been selling down assets to reduce their debt.
Wanda has recouped close to Rmb100 billion ($15.7 billion) by divesting real estate assets at home. These include a 14% stake in its commercial property unit, which it sold to a consortium of investors led by internet giant Tencent (see WiC396)
The property firm has also been shedding overseas assets in Australia and Europe. Last month, it sold a 17% stake in Spanish football club Atletico Madrid to Israeli billionaire Idan Ofer for an undisclosed sum.
Formerly high-flying HNA is following suit. According to Bloomberg, the Hainan-based firm is in the process of selling more than $6 billion in property assets. Last month it agreed to sell two key plots of land in Hong Kong – bought less than a year ago – for $2 billion to Hong Kong developer Henderson Land.
(In a separate development news also emerged this week that China Energy Reserve and Chemicals has pulled out of a $5.1 billion deal to buy a Hong Kong office tower from Li Ka-shing, the territory’s richest man. Shimao Property’s founder Xu Rongmao and Hong Kong financier Pollyanna Chu have now replaced the state-run firm in the deal.)
Anbang looks set to go down the same route and speculation is rife that the CIRC has already put some of the insurer’s assets up for auction, reported the Wall Street Journal. One potential buyer could be Blackstone. The private equity firm has been a serial counterpart of Anbang and HNA – where it has played the role of the seller (see WiC369). Bloomberg reported last month that Blackstone is now in talks to buy back some of the assets it sold to Anbang, including the Waldorf Astoria and a stake in Strategic Hotels & Resorts.
Did Anbang breach capital controls?
For more than a year it has been evident that Beijing has been concerned about companies moving money out of the country (see WiC395) and exacerbating capital flight. At the beginning of 2017 this was putting China’s currency under pressure and the State Council announced new directives last August that curtailed “irrational” overseas investment in the property, entertainment and sports sectors. Curbs on capital remittances by individuals were imposed too.
But given Anbang’s relationships in the banking system, there was talk that the insurer’s difficulties might also threaten China’s financial security at home.
At the end of 2017, Anbang claimed assets of Rmb1.9 trillion. This included substantial stakes in Chinese lenders such as Minsheng Bank. Indeed, the news of Wu’s arrest came last year amid media reports that Anbang had taken advantage of its position as a major Minsheng shareholder to draw down a loan of $15 billion from the bank.
The lender has since clarified that its loan exposure to Anbang amounts to just $100 million. But a recent interview with Guo Shuqing, the chairman of the China Banking Regulatory Commission, has underlined that regulators have been anxious of the wider impact – with some even blaming the extraordinary stock market meltdown of 2015 on the shadow banking activities of the more buccaneering insurers like Anbang.
“Some shareholders have taken the banks as their own ATM machines, conducting recklessly improper connected transactions and interest transfers,” Guo told the People’s Daily in January.
“Through complex shareholdings, a few individuals have even illegally built up certain enormous financial conglomerates, which have become a serious threat to our financial reforms and the security of the banking system.”
Guo’s remarks raised an obvious question in China’s financial circles: which “enormous financial conglomerates” could the CBRC boss be talking about?
For many onlookers, the answer was obvious too. And according to Economic Daily News, Anbang ticked all the boxes.
Another candidate, the newspaper suggested in January, was Tomorrow Holdings, the investment arm of financier Xiao Jianhua. Like Wu, Xiao is no longer at leisure – he is said to have been seized by Chinese agents from Hong Kong’s Four Seasons hotel (see WiC354) and deported back to the mainland last February. The newspaper added that Xiao is now under “vacation-style investigation” in a Shanghai hotel in which the only other guests are anti-graft officials.
How has the market reacted?
So far, the response to Anbang’s nationalisation has been remarkably calm. Partly that was because the announcement was made during the week-long Chinese New Year holiday (likewise, Xiao disappeared from public view in Hong Kong on the eve of the Spring Festival).
Clearly, the authorities would prefer to keep the takeover low-profile and Bloomberg columnist Nisha Gopolan has applauded the Chinese authorities for dodging an “AIG moment” by nipping a potential financial disaster in the bud.
However, the Wall Street Journal has characterised Anbang’s rescue as “China’s too-big-to-fail moment”, with the state taking over a major insurer after allowing smaller firms to go bust in recent years.
Analysts have also been weighing up the impact of Anbang’s seizure on the future of China’s outbound M&A. Other heavyweights are still active in the international arena, including Geely, which has just invested in Daimler. Fosun, another major dealmaker, has just bought a controlling stake in French couture firm Lanvin and its boss Guo Guangchang told the Financial Times this week that he is ready to invest further overseas. “We are very transparent,” Guo insisted. “The Chinese government is very law oriented so they support companies who respect the law.”
Others might need more convincing, with warnings that Anbang’s overhaul is another signal that Chinese firms shouldn’t be allowed to take control of key assets.
“If it can happen to Anbang, it can happen to any number of Chinese firms looking to gain a share of our critical industries, infrastructure and technologies,” Robert Pittenger, a Republican congressman, told the New York Times. In an editorial this week, the Financial Times offered partial agreement: “Governments should insist on evidence of buyers’ financial strength before allowing economically important companies to be sold to any buyer, Chinese or otherwise.”
Born to succeed…
That’s the headline from 2014 when we first reported on Anbang’s incredible rise (see WiC226). We were drawing on the insurer’s seemingly strong political ties. Besides Wu, another of its key stakeholders was Chen Xiaolu, the son of Chen Yi, a PLA marshal. In China, Wu and Chen are part of the hongerdai, or “red second generation” of the Party’s revolutionary-era leaders. But it has been a turbulent week for this influential group of princelings and just days after Anbang’s takeover, there was another piece of news: Chen, 71, died in Beijing on Wednesday of heart failure.
It is not immediately clear how his death will impact on the CIRC’s efforts to bring in new shareholders. What’s evident is that Wu’s hongerdai status was far from bombproof at a time in which Xi Jinping’s leadership team has been strengthening its control.
(Caixin Weekly also reported on Thursday that Ye Jianming, the boss of CEFC Energy and another politically well-connected tycoon, has been put under investigation. However, the South China Morning Post noted a day later that CEFC had denied Ye was being probed, though the paper said stocks tied to CEFC continued to slide in Friday morning trading.)
Scrutiny of the financial sector is rising under Xi. Over the past two years a new boss has been appointed to each of the main financial regulatory agencies and Zhou Xiaochuan, the long-serving central bank governor, is also expected to retire this month.
In the context of Anbang’s nationalisation, the other news from the regulator was a surprise: the decision to issue a coveted new insurance licence late last month. The lucky beneficiary? Geely, the Zhejiang-based automaker whose overseas dealmaking has so far been unaffected by the policy headwinds (see this week’s “Auto Industry”). Over the past year the carmaker’s Hong Kong-listed stock has surged 150%.
Keeping track, Apr 6, 2018: In an interview with the People’s Daily, Guo Shuqing, then chairman of the China Banking Regulatory Commission (CBRC), launched a fierce attack on financiers who had treated China’s banking system like “their own ATM machines”.
“Through complex shareholdings, a few individuals have illegally built up certain enormous financial conglomerates, which pose serious threats to our financial reforms and the security of our banking system,” he told the Party-run newspaper in January.
The remarks had China’s financial circles buzzing with speculation about which “enormous financial conglomerates” Guo would be going after.
Anbang Insurance seems to have ticked all the boxes. Founded in 2004, the insurer had grown into a monster with nearly Rmb2 trillion ($320 billion) worth of assets. Indeed, Guo’s first task as the head of China’s new regulator for banking and insurance (CBIRC) is defusing the systemic risks posed by the tangled connections of Anbang, which has been put under temporary nationalisation (see WiC399).
The CBIRC this week approved a Rmb61 billion capital injection into Anbang from a government fund. In a statement, Anbang said the bailout would raise its registered capital to Rmb62 billion, which means the government would now own more than 98% of the company, replacing existing shareholders such as Wu Xiaohui. Anbang said it would now start a selection process to bring in new “strategic investors”. It added that “large private sector firms in the elderly care sector, healthcare and fintech” would be the most welcomed for the upcoming restructuring.
Meanwhile, a Shanghai court started the trial of Anbang’s former chairman and major shareholder Wu this week. Wu was accused of defrauding Anbang of Rmb65 billion with the funds transferred to companies he personally controlled for overseas investment (at the equivalent of $10.3 billion this is the biggest sum WiC can recall being revealed by a Chinese court in an ‘economic crimes’ case).
According to a short clip broadcast on state television, Wu is contesting all charges against him. “I don’t have a good understanding in law, and don’t know if I have already committed crimes,” he said.
However, in a voice over, the broadcaster claimed Wu is going through a period of “self-reflection”, showing regret for the crimes and expressing deep remorse for his actions.
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