BEIJING/SHANGHAI -- China's de-facto takeover of Anbang Insurance Group shows the government will take any steps necessary to stave off shocks to the financial system, suggesting even tougher times await financial conglomerates with massive overseas portfolios.
Senior officials at the financial services conglomerate received a stern warning from authorities to show up for work on Thursday, the first day back from the Lunar New Year holiday. A day later, the world found out why, when regulators announced they had taken control and installed new management, consisting mainly of the personnel from the China Insurance Regulatory Commission. The company will remain under state control for one year, according to an announcement by the commission.
Ousted Chairman Wu Xiaohui is being prosecuted for fraud and embezzlement after being arrested last June. The powerful executive is alleged to have used his marriage to a granddaughter of China's late leader Deng Xiaoping to secure permits and deregulation beneficial to his company.
Even in China, it is unusual for the government to assume control of a private-sector business. But then, Anbang is an unusual company: A little over 10 years after its 2004 founding, the group had amassed 2 trillion yuan ($315 billion) in assets. In addition to China's No. 3 life and nonlife insurance company, the group contains a plethora of financial businesses, from banks and securities brokerages to real estate and investment firms. It employs roughly 40,000 people.
In recent years, Anbang has embarked on an overseas shopping spree with income from its popular high-yield life insurance policies, snapping up foreign firms and real estate. In 2014, it purchased the famed Waldorf Astoria hotel in New York, host to presidents and foreign dignitaries, for nearly $2 billion. In 2016, the group spent over $7.3 billion on foreign acquisitions, nearly three times its outlay two years earlier, according to data from the American Enterprise Institute for Public Policy Research and the Heritage Foundation.
The company is not alone in its overseas ambitions. Four major Chinese business groups -- Anbang, HNA Group, Dalian Wanda Group and Fosun International -- together splurged close to $35 billion on foreign acquisitions in 2016, accounting for 20% of Chinese companies' overseas purchases. Some suggest this spending was overseas transfers of assets disguised as acquisitions, pointing out these companies' links to senior Communist Party officials.
The government fears that the more foreign assets these groups amass, the greater the risk that a plunge in prices will send them into crisis -- if they are rendered unable to make good on insurance policies and other financial products. It could rock the entire financial system at a time when President Xi Jinping and his allies want nothing so much as to ensure stability.
In this light, the government takeover of Anbang is not particularly shocking. Guo Shuqing, chairman of the China Banking Regulatory Commission, telegraphed the move in January, telling the Communist Party's People's Daily newspaper that massive, illegal financial groups posed a grave threat to financial reforms and the stability of the banking system. China will address the issue seriously, in line with the law, he said.
Xi's government has ramped up pressure on financial heavyweights since last spring. Banks were ordered to curb lending to the big-four financial groups, while Anbang, HNA and Wanda were urged to sell assets and repay debts.
These sell-offs are likely to continue: HNA carried debt worth more than 700 billion yuan at the end of June, and faces a potential cash shortfall of about 15 billion yuan in the January-March quarter, European and American media report. Wanda has sold off its stake in a Spanish soccer club and disposed of hotel and theme park assets to cover debts incurred during its overseas binge in the entertainment and hospitality fields.
Last fall, at the Communist Party's twice-a-decade National Congress, Xi put stabilizing the financial sector by cutting down on risky debt at the top of his economic agenda. By seizing control of one of China's largest financial entities, the government has demonstrated it has no intent of slowing down.
Sounding the alarm on unchecked foreign acquisitions also aims to address Beijing's concerns that monetary tightening in the U.S. could accelerate capital flight from China and weakening in the yuan. These trends ran rampant through last spring, forcing the government to intervene in the market to protect its currency. Beijing considers financial conglomerates' heavy overseas asset acquisitions to be a chief cause.
The CBRC's Guo has indicated he intends to draw up a comprehensive regulatory measure for the nearly 30 private-sector financial conglomerates like Anbang that are said to be operating in China. Not only Guo's organization, but also insurance and securities watchdogs and the central bank, have sent some of their personnel to Anbang following the government takeover. Running the company for a year could help those regulators gain knowledge and experience to better regulate those complex financial entities.