Yesterday afternoon the Chinese government seized control of debt-ridden Chinese insurance giant Anbang in a show of force that took many analysts off-guard. The company’s founder, Wu Xiaohui, is also being prosecuted for financial crimes, according to a statement released on Anbang’s company website.
Anbang, whose total assets comprise RMB 2 trillion ($315 billion), has seen rapid expansion in the past few years fueled by debt. Since 2014 the insurance broker has spent over $20 billion on acquisition deals, notable examples being the Waldorf Astoria in New York, and the purchase of over $1 billion of mortgages from Dutch financial firm Rabobank.
The official statement goes on to explain that the forced acquisition will put the insurance dealer into the hands of China’s financial regulators for at least a year, while they attempt to stabilize its balance sheet by selling off assets or accepting injections of capital from strategic shareholders. Anbang will, however, remain a private company officially.
The grounds for prosecuting Wu were not detailed in the statement, beyond his involvement in activities that “may seriously endanger the solvency of the company.” This is not the first time Wu has been detained by the authorities – he also found himself in state custody in the summer of last year. He has long been associated with the Chinese political community, having even married the granddaughter of renowned Chinese statesman Deng Xiaoping.
The government began to red-flag Anbang after it started aggressively lending high-return wealth management products to small private investors under the guise of insurance. Using this as a means of pumping out capital, Anbang developed a portfolio of foreign assets in Europe, the U.S. and Asia. In a single six-year stint, the assets of Anbang’s life insurance unit multiplied 2,876-fold, to $213 billion, according to the New York Times.
The acquisition is significant in that it shows Beijing is about to step up the intensity of its efforts to combat threats to its financial system. It will also serve as a shot across the bows of other “financial crocodiles,” firms that have grown recklessly by borrowing to gobble up foreign assets, such as HNA and Wanda Group.
“Clearly it is designed to be a warning shot to firms engaged in particular types of financial engineering and leveraged acquisitions (as Anbang was),” Tom Rafferty of the Economist Intelligence Unit told the BBC. “The government has made clear reducing financial risk is one of its main policy priorities.”
To invoke the famous Chinese expression 杀鸡吓猴, or “kill the chicken to scare the monkeys,” Anbang looks to be the playing the unfortunate role of the chicken.