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Opinion

Anbang shows China's vanishing divide between public and private

Takeover of insurer should come as no surprise

Anbang Insurance Group Chairman Wu Xiaohui   © Reuters

The move by Chinese regulators to take control of Anbang Insurance Group, the nation's third-largest insurer in terms of assets, has sent a loud signal across the financial industry.

Loud, but not so clear. From a business perspective, nothing has really changed. Since last June, Chairman Wu Xiaohui has effectively been under arrest and the China Insurance Regulatory Commission has been inside the company trying to unravel what has been going on.

The regulatory takeover is really just the next step in that process. It may be headline news, yet for well over a year, the expected path of Anbang has been some sort of government-led bailout cum restructure cum asset sale. If you were prepared to deal with Anbang last month, then there is little reason not to deal with them next month. The problems were already out there.

Anbang rose to prominence domestically with the explosive growth in sales of its universal life policies. Their short term and high returns proved extremely popular with China's demanding retail investors.

The company's international fame, or notoriety, came with the $1.95 billion purchase of the landmark Waldorf-Astoria New York hotel in 2014. A slew of other high-profile and high-priced deals followed. Things however clearly started to go wrong for Anbang when it unexpectedly pulled out of a bidding war for Starwood Hotels & Resorts Worldwide nearly two years ago.

The collapse of its $14 billion bid for the company raised many questions about where Anbang's funding had come from and who actually owned it. Even Chairman Wu, who had married into the family of late leader Deng Xiaoping, remained a mystery to most.

Anbang, which built up more than $300 billion in assets globally, is one of the most prominent of a number of quasi-private companies that went on a global spending spree in recent years. It ran in parallel with growing capital flight out of China, an ever expanding corruption crackdown and credit growth running well ahead of economic growth. The Anbang story brought together all these threads.

It should be no surprise that Anbang was in for a hard time. A clampdown last May on the selling of universal life policies brought a collapse in revenue. The dismissal of the chairman of the China Insurance Regulatory Commission was another measure in President Xi Jinping's clampdown on financial risk and malpractice. Overstretched companies like Anbang were clearly in the government's crosshairs.

But do the recent events mean that Beijing is now going to intervene in any company, private or state-owned? Does the fact that the state has taken on the role of running Anbang mean that it posed a major risk to the financial system?

It does seem to indicate that the Communist Party's 2013 call for "the market to play a decisive factor" really has no weight anymore. The state and the party are the decisive factors, but who did not already know that?

Those reading the CIRC's actions as China's equivalent of the U.S. government's 2008 takeover of insurer AIG or Washington's wider $475 billion financial-sector bailout are just wrong. Only a fool would downplay the financial risks now present in China but this is not a major tipping point.

Anbang's problems were well-flagged in advance. There has been no mass panic in the financial markets nor has there been serial failure of institutions to make payments and meet obligations. The state has been very active in clamping down on capital flight and a number of other areas of financial risk. While deleveraging may be honored in the breach more than the observance, it is difficult to see how Anbang might have brought down the financial system. If nothing else, the unprecedented coordinated action of the CIRC together with the country's other four financial regulators at least shows that there is full regulatory focus on containing problems.

Perhaps the biggest pending questions are whether this regulatory receivership is going to be a template for things to come and if so, who may be next? The fortunes of the four big private companies which were prominent in the quest for overseas assets - Anbang, HNA Group, Dalian Wanda Group and Fosun International -- have turned out rather differently.

Fosun's chairman disappeared into the authorities' grasp for a couple of weeks but the company seems to be operating without issue now. Wanda has been actively selling down a slew of assets to pay down debt. Even seemingly untouchable HNA is now in retreat mode.

There is no reason to think that any of those three are at risk of following in Anbang's footsteps immediately. Yet no one should doubt Xi's resolve to take control when he thinks necessary. Given their essential roles in China's e-economy, if Alibaba Group Holding or Tencent Holdings were to ever veer from an acceptable path, the prospects of a similar state-led regulatory takeover should not be discounted.

Anbang was an outlier though among its peers. While ownership structures involving dozens of interrelated companies to hide interests is the norm in China, Anbang's luck simply ran out. Whether the root of its problems were political or economic may never fully be understood.

While further regulatory takeovers may be unlikely, government-orchestrated bailouts and restructurings are almost certain to come. There will be a greater call upon the private sector to help fund these deals through equity injections or debt securitization. Xi's China seems to care less and less about the distinction between the private and state sectors. Building the Chinese dream is regarded as a shared effort.

How should overseas regulators and governments react to the Anbang takeover? I doubt New York City's mayor would have ever thought that the Waldorf-Astoria, which until Anbang's purchase was the residence of the U.S. ambassador to the U.N., would be under the direct management control of the Chinese insurance regulator.

The lessons are simple. Chinese investments always require deep due diligence and understanding of the parties involved. The distinction between state and non-state actors is becoming less clear because the Chinese state is making it so. Who are you? Where does your money come from? These basic questions often get partial answers when it comes to Chinese investment. China will continue to invest globally for years to come and that should be welcomed, but more than ever understanding who you are dealing with and the possible consequences of doing will be vital.

Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise." He has worked in China's capital markets since 1992.

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