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Caixin

China authorities seize fallen tycoon's multibillion-dollar firms

Companies held total assets of $172bn; crackdown aims to ease risk

The moves aim to protect investors’ legitimate interests, regulators said.    © Reuters

The Chinese government has seized nine financial companies formerly controlled by fallen tycoon Xiao Jianhua for alleged lawbreaking, in an unusually aggressive move to deal with risks from his once freewheeling financial empire.

The China Banking and Insurance Regulatory Commission (CBIRC) took over four insurance companies and two trust firms, and the China Securities Regulatory Commission (CSRC) seized two securities companies and one futures firm, according to official statements released Friday.

All were previously controlled by billionaire Xiao, who was placed under investigation for graft by Chinese authorities in January 2017. They have not disclosed the specifics of the investigation.

The moves aim to protect investors' legitimate interests, both regulators said. The takeovers, which took place Friday, will last at least a year, during which the companies will continue to operate normally, according to the watchdogs.

The massive seizure involves assets amounting to more than 1.2 trillion yuan ($171.5 billion), according to Caixin calculations based on financial reports. It marks a major step for regulators to dismantle a sprawling business empire built by Xiao under the umbrella of Tomorrow Holding, one of the highest-profile targets of China's crackdown on financial risk.

Founded in 1999, Tomorrow Holding grew into a conglomerate with businesses ranging from banking, securities and insurance, to coal and real estate. Through complicated and sometimes illegal shareholding arrangements, Tomorrow Holding controlled a large number of financial institutions that helped fund Xiao's debt-driven business expansion.

The nine companies formed a key part of the Tomorrow Holding financial business that backed many of its high-profile acquisitions in recent years, which often involved complicated transactions and the use of shell companies.

Many of the financial institutions had funds embezzled by Tomorrow Holding, which ended up failing to repay the money, causing high risks for the institutions and their clients, sources close to the regulators told Caixin.

Last year, the top banking regulator took over Inner Mongolia-based Baoshang Bank, a debt-ridden lender controlled by Xiao. The bank was later restructured into Mengshang Bank, with major shareholders including a national deposit insurance fund managed by the central bank, the government of the Inner Mongolia autonomous region and Anhui-based Huishang Bank.

Several other regional lenders previously controlled by Tomorrow Holding, including Bank of Taian, Bank of Weifang and Harbin Bank, have also launched government-led restructurings to cut ties with the troubled conglomerate.

The government's efforts to break up Xiao's financial empire echoed the crackdown on Anbang Insurance Group, another freewheeling conglomerate controlled by now-imprisoned businessman Wu Xiaohui. Anbang was restructured into Dajia Insurance Group after a two-year period of state custody and massive asset spinoffs.

Dismantling the empire

Huaxia Life Insurance, Tianan Property Insurance of China, Tianan Life Insurance of China, E An Property & Casualty Insurance, New Times Trust and New China Trust were placed under state custody to "protect the rights of policyholders and customers and to serve the public's interest," the CBIRC said in its statement.

The four insurers had combined assets exceeding 800 billion yuan by the end of 2019 but suffered different degrees of business and debt problems. The largest one, Huaxia Life, reported a profit drop of more than 77% in 2019, and Tianan Life booked a net loss of 2.5 billion yuan. The two trust firms managed a total of 467.7 billion yuan of assets at the end of 2019.

The regulator assigned six institutions to supervise each of the seized companies' daily operations. They are China Life Healthcare Investment, China Pacific Property Insurance, New China Life Insurance, PICC Property and Casualty, Citic Trust and Bank of Communications International Trust.

The takeover will not alter the companies' debt obligations or creditor rights, and business operations will continue as normal, the regulator said.

On the same day, the CSRC assumed control of Guosheng Securities, New Times Securities and Guosheng Futures, citing their failure to accurately disclose their ownership and flaws in their corporate governance.

CSC Financial, Avic Securities, China Merchants Securities and Guotai Junan Futures were appointed to manage the companies' daily operations. The takeover will not affect their businesses and trading, the CSRC said.

New Times Securities had 22.1 billion yuan of assets as of the end of May. Guosheng Securities had assets of 30.8 billion yuan, and Guosheng Futures, 746 million yuan, the CSRC said.

In 2018, China's central bank identified Tomorrow Holding as one of several "financial holding companies" that needed to be scrutinized for their ownership structure, connected-party transactions and sources of funding as part of a sweeping clampdown on financial risk.

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Read also the original story.

Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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