Just a few months ago, Wu Xiaohui, chairman of China's troubled Anbang Insurance Group, was in New York trying to secure a better credit rating for the voraciously acquisitive company he founded in 2004. Now he has disappeared, unseen since May, and is believed to have been detained by the authorities. Anbang said on June 13 that Wu was unable to fulfill his duties at the company he founded for "personal reasons."
His disappearance ends a long period during which Beijing-based Anbang used yuan deposits in China as collateral for offshore borrowings to pay for acquisitions such as the $1.95 billion purchase of the Waldorf Astoria hotel on Park Avenue in New York. But then informal measures designed to discourage capital outflows from China were making such financial arrangements increasingly difficult. Moreover, Anbang has suffered from regulatory moves against a range of wealth management products based on insurance policies that have fueled out-of-control credit growth and asset bubbles, particularly in the property market.
The danger of the invisible leverage that these products provide has been magnified by the fact that most are short term, while the money raised has gone into much longer-term projects. What appeared to be traditional life insurance products were actually high-risk investment products with no transparency about who, if anyone, stood behind them.
Wu is one of a new generation of Chinese entrepreneurs who have taken advantage of political and regulatory connections to build corporate empires at home and then invest abroad. Others include Chen Feng, founder of Hainan-based HNA Group, a finance-to-aviation conglomerate, and Guo Guangchang, one of the founders of Shanghai-based Fosun International, an insurance and investment group.
In the process, they have bought assets ranging from high-profile professional sports clubs such as England's Wolverhampton Wanderers to Club Mediterranee, a French tour operator. Other trophies include distressed financial companies in the U.K. and continental Europe, residential property in Japan, and hotels and the Canadian Cirque du Soleil entertainment group in North America.
All these entrepreneurs profess huge admiration for Warren Buffett, the deal-making chairman of Berkshire Hathaway, a U.S.-based conglomerate holding company. But what they admire is less the value discipline of the "Sage of Omaha" than his use of other people's money.
The premiums that insurance companies collect on life insurance policies are intended to cover contingent liabilities -- payouts on claims. They are not "free money," as some Chinese insurers appear to believe. Part of Wu's problem is that Beijing has now identified this risk. "The government is taking draconian measures to make sure these companies don't bring on a financial crisis," said a top executive at one of the most powerful financial services companies in China.
STORING UP TROUBLE Wu differs from his counterparts at Fosun and HNA in ways that have made him more vulnerable. Other serial acquirers have relied on listings outside China and massive bank borrowings to finance their ravenous appetites for foreign assets, and have thereby become too big to fail. For example, Guo was detained by police in December 2015, apparently caught up in a Communist Party disciplinary investigation in Shanghai, but was released after four days, in part because Fosun's lenders appealed to Beijing for his release. They pointed out that if the company was unable to repay its debts, Guo's difficulties would swiftly be transmitted to them. Similar fears of financial contagion will likely give HNA the same sort of lease on life.
Wu has not borrowed as heavily from banks as HNA and Fosun. But he also had access to fewer financing alternatives outside China. In particular, Anbang lacked the transparency necessary for a flotation on an overseas stock market. Some investment banks, including Morgan Stanley, told their head office compliance departments that the reputational risk involved in helping Anbang to list would be too great. Anbang officials say that credit ratings agencies refused to give the company an investment-grade rating -- which would have enabled it to issue debt abroad at an attractive price -- because Wu could not provide adequate information about his shareholders.
Wu's indifference to the rules also alienated regulators. A failed $13 billion bid for the U.S. Starwood Hotels and Resorts chain, for example, violated Chinese limits on spending on a single offshore deal. When advisers suggested to Wu that he should obtain regulators' permission in advance of the bid, and line up secure financing, he told them that was unnecessary because he knew "everyone from the chairman to the doorman" at the China Insurance Regulatory Commission.
Wu had to withdraw abruptly from the bidding, giving rise to complaints from rivals that they would have to pay higher premiums for overseas assets in future because he had proved to be such an unreliable bidder. "Anbang is the most egregious company," one regulator recently said. "It has grown much too fast and it has no management."
Wu ultimately fell victim to a combination of two forces: Beijing's determination to control capital outflows, and the poisonous politics of the capital. He alienated some of Chinese President Xi Jinping's closest associates as well as the regulators. Although he married into the family of China's former paramount leader Deng Xiaoping, he never had the family's protection; he and his wife have lived separate lives for several years.
It is not clear what Wu's fate will be. Neither is it certain whether Anbang can survive without its founder. Insiders in Beijing believe that Wu will be removed, and that Anbang's operations will be wound down over time. Holders of the company's investment products will surely be compensated to avoid mass protests, but its business could be merged with a stronger rival, such as China Life Insurance or Shenzhen-based Ping An Insurance.
Anbang was always regarded as a one-man show. Precisely because of that view, the contagion effect is likely to be far less than might be feared if others who sought to fly without parachutes run into similar difficulties.
Henny Sender is the Financial Times' chief correspondent for international finance based in Hong Kong and contributes occasional columns to the Nikkei Asian Review. She has extensive experience covering international finance in the U.S. and Asia, including in Japan, Hong Kong and South Asia.