Economy, Talking Point

He flew too close to the sun

What can we learn from the jailing of Tomorrow tycoon Xiao Jianhua?


Xiao: once one of China’s richest men, now set to spend 13 years behind bars

Xiao Jianhua once ranked himself as the leading contender among a group of tycoons aspiring to be known as the Warren Buffett of China. It was only after studying the Berkshire Hathaway chairman’s approach that he started to edge away from the world of politics and focus more on investment, according to a statement sent by Xiao to the New York Times in 2014 .

Certainly, Xiao seems to have paid close attention to Buffett’s strategy of leveraging capital through his stakes in insurance businesses (Buffett calls it the ‘float’). The Chinese financier is said to have been heavily involved in two of the most high-profile deals in the Chinese insurance sector. First in 2009 Taiwanese newspapers reported that Xiao was the key investor behind China Strategic, an obscure firm that emerged as the unlikely winning bidder for Nanshan, the Taiwanese unit of American insurance giant AIG. The deal eventually collapsed. But three years later, when Thai conglomerate Charoen Pokphand bought a 15.6% stake in Ping An Insurance, Caixin magazine reported that Xiao had again helped to fund the $9.5 billion purchase.

Publicly Xiao denied involvement in the deals but the rebuttals didn’t stop speculation about the Chinese-Canadian businessman. One of the main rumours was that he was a frontman for other investors and that he was helping some of China’s most powerful families to move money around between different investments. An article on the website of the People’s Daily described him as a “porter” rather than a creator of wealth, for instance.

Whatever his commercial focus, Xiao was heading for a spectacular fall from grace. In 2017 his whereabouts became unclear after he was reported to have been bundled out of Hong Kong’s Four Seasons hotel and delivered back to mainland China for investigation. The financier’s Tomorrow Group – it was now claimed – controlled more than Rmb3 trillion ($438 billion) in assets, making it one of the most-watched Chinese financial crime cases in recent memory. And last week the authorities brought the final curtain down on the saga by giving their verdict on the future of the formerly influential financier.

What’s the outlook for Xiao?

There was no official word on Xiao’s whereabouts until 2020, when regulators took over nine of his companies and Tomorrow Group confirmed he had returned to mainland China to cooperate with investigators. Although the investigation into Xiao’s affairs took a convoluted five years, the legal proceedings to convict him were over within a month, however. In a verdict published on its WeChat account last Friday, the Shanghai First Intermediate People’s Court announced that Xiao had been sentenced to 13 years in prison after being convicted of a slew of financial crimes. His Tomorrow Group will be fined a whopping Rmb55 billion while Xiao has to cough up another Rmb6.5 million personally.

The punishment will go down as the largest fine for a Chinese private-sector firm on record – more than the financial penalty meted out to Anbang Insurance (briefly famed for its seemingly insatiable acquisition streak in foreign markets).

Anbang was seized by the state and reincarnated as Dajia – which means ‘everyone’ in Chinese – after its founder Wu Xiaohui was seized by investigators two months after Xiao’s disappearance in 2017. It took the government just a year to conclude Anbang’s case, giving Wu (reportedly a grandson-in-law of former leader Deng Xiaoping) an 18-year jail sentence, plus a Rmb10.5 billion fine. On top of that Wu was later told to return another Rmb75 billion in illegal income personally.

It’s not clear if Xiao’s time in prison has been adjusted to reflect the five years he has already spent under house arrest. Some reports suggested he was holed up in a luxury Shanghai hotel while regulators untangled his financial empire.

If the personal penalty meted down on Xiao looks relatively lenient, that is most likely because he decided to assist with the investigation. Indeed, according to the written verdict, Xiao had not only “turned himself in” – an implicit rebuttal of the widely held view that he was abducted from the Four Seasons in 2017 by Chinese agents who were not allowed to operate in Hong Kong – but that he had also done his best to comply with the investigators.

“Xiao Jianhua has taken commendable actions, so he was given a mitigated punishment in accordance with the law,” the judgment noted. These actions included pleading guilty – something that Anbang’s Wu refused to do – and probably giving evidence against some of his former cronies in the Communist Party elites, which would have given him a little more leverage with his investigators.

One of the crimes that Xiao was convicted of was bribing numerous government officials with shares, real estate and cash worth more than Rmb680 million between 2001 to 2021 in a quid-pro-quo to evade fuller oversight, the court statement said. That seems to imply, incredibly, that Xiao was still trying to bribe his way out of trouble while being held in custody.

The rest of the court ruling is less salacious. Tomorrow Group came into being in 1999. Via a complex web of “decentralised equity” and “anonymous shareholdings”, Xiao then violated laws and regulations by taking control of a number of financial institutions, including banks, insurers, trusts and internet platforms, the court said. Xiao’s company was also found to have raised up to Rmb312 billion in funding from the public improperly between 2010 and 2017, and he and Tomorrow were found guilty of other wrongdoings such as the unauthorised use of client funds for acquisitions and overseas investment.

As a result, the court ruled that Xiao and Tomorrow had “seriously damaged the financial management order and seriously endangered the national financial security,” according to the statement.

Most of these judgments look strikingly similar to those suffered by Anbang’s Wu. However, there is no indication that Xiao is seeking to contest the ruling, as Wu initially attempted.

Why was Xiao’s case so keenly watched?

The sheer size of Tomorrow Group – the statement from the court said that Xiao controlled at least four major insurers including Huaxia Life and Tianan Life, as well as a regional bank in Inner Mongolia’s Baotou city (Chinese media reported back in 2013 that he controlled as many as 13 regional lenders) – means that regulators have had to wind down the company’s interests without causing wider damage to the Chinese financial system.

Investigators must have also been wary about the political dimension to the Xiao case. In 2014 Xiao told Hong Kong’s now defunct Next magazine that he had strong connections with powerful princelings in China, for instance, including the son of former Vice President Zeng Qinghong. He immediately made the point that he hadn’t made “a penny from the families of Chinese leaders”. In spite of this qualifier, some China-watchers believed Xiao’s success derived from the fact that he was not openly aligned to any faction, but was instead universally regarded by the elite as the competent go-to man to make financial arrangements. 

All of which may help to explain why Chinese media outlets and bloggers on social media have been remarkably disinterested in discussing the court’s ruling.

The reaction underlines the sensitivity of the case, especially at a time when the 20th Party Congress will soon be held to select China’s next president. “The trial arrives at a sensitive moment, with Xi poised to seek a precedent-breaking third leadership term,” a Bloomberg commentary noted last month. “Any fireworks or controversy would be unwelcome.”

Stability was also the name of the game when financial regulators started to tear apart the insurance sector just ahead of the 19th Party Congress in 2017. Two months after Xiao had been ferried across the Hong Kong-China border, Xiang Junbo, head of the China Insurance Regulatory Commission, was sacked for accepting bribes. Less than two months later, Anbang’s Wu was arrested on corruption charges. Guo Guangchang, the boss of investment conglomerate Fosun (and another tycoon who fashions himself as China’s Buffett), was called in for ‘a cup of tea’ with senior government officials to discuss another unspecified investigation.

The slew of high-profile cases turned off the tap on the gush of overseas M&A orchestrated by the likes of Anbang, HNA and Fosun, and in July 2017 a new super regulator called the Financial Stability and Development Committee (FSDC) was set up to guard against systemic risks to the financial sector.

What else can be learned from Xiao’s Icarus-like career?

Judging from the rise and fall of Xiao, as well as the demise of Anbang’s Wu, China’s insurance sector is unlikely to accommodate a Warren Buffett-style financier in terms of personal influence. Xiao’s Baoshang Bank, the financial unit in Inner Mongolia that jumpstarted his ambitions to build a Berkshire Hathaway-type style business 20 years ago, was nationalised in 2019. So were another four of his major insurance units and a number of trust firms over the last five years.

During this period the Chinese government has also rolled out new regulations to shape the behaviour of financial holding companies. One important change is that any entity which controls at least two financial institutions now needs to apply for an appropriate licence from the central bank. The People’s Bank of China is also accelerating legislative efforts to strengthen its role in “making overall plans for systemically important financial institutions and financial holding companies”, the China Daily reported this month.

Such changes will subject new arrivals in the financial sector to more stringent oversight too, including Ant Group, the fintech arm of internet giant Alibaba, which has also been transformed into a financial holding company under the oversight of the central bank as part of a major overhaul demanded by the Chinese government.

Xiao’s imprisonment also draws a line under his lengthy period in Hong Kong, a city he called home before he was taken back to mainland China. Before his unanticipated checkout from the Four Seasons, Xiao had joined other Chinese tycoons in residence at the hotel, which had earned the local nickname of the “north-facing watchtower” because of the way that a few of its more anxious guests were watching events in mainland China so closely.

Xiao’s repatriation was an early example of Hong Kong’s limitations as a place of refuge. His case also contributed to the framing of a controversial extradition law proposed by the Hong Kong authorities in late 2018, which triggered months of street protests televised around the world.

That led to other legislative changes in the city. Indeed, another unintended and indirect consequence of Tomorrow Group’s unravelling, as events eventually played out, was the introduction of a national security law in Hong Kong.

© ChinTell Ltd. All rights reserved.

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.