Noose Tightens on Dangerous Debt
China's insurance regulator announced on February 23 that it had seized control of Anbang Insurance Group and that its chairman, Wu Xiaohui, had been charged with financial crimes that included illegal fund-raising, fraud and embezzlement. The regulator said it would run the company for a year.
Anbang's fall suggests China is finally taking decisive action against serious and prevalent violations of financial regulations that have underwritten the emergence of financial gurus like Wu at the cost of the country's financial health.
Starting out as a small car insurance company in 2004, Anbang emerged to become one of China's biggest financial firms, and at its peak held assets of some 190 billion yuan (US$30B). Anbang's growth model was simple: raise funds and purchase real estate. Its most prominent acquisition was the US$2 billion deal to purchase New York's landmark Waldorf Astoria hotel in 2015.
Anbang's expansion came not through shrewd entrepreneurship but the aggressive use of extended leverage, which itself was facilitated through the powerful political connections of Anbang's founders.
The tactic of using over-extended leverage by Chinese financial and real estate companies has seriously threatened China's financial stability and damaged the corporate culture of the financial and real estate sectors. In response, the authorities tightened control of cross-border overseas purchases in the real estate sector last year, telling many companies to reduce their debt level. Among the most affected is Wanda Group, China's biggest real estate company.
Not only has Wanda suspended and terminated its planned overseas purchases, it has also sold many of its projects in order to reduce its debts. In July 2017, Wanda reached a deal of 63.2 billion yuan (US$9.3B) with Sunac, a major property developer, to sell some of its hotels, land and projects.
In the meantime, China's authorities have strengthened their push for Chinese companies to make overseas purchases in manufacturing and other sectors of the real economy.
The latest example is the announcement by Li Shufu, owner of Geely automotive group, that he had acquired a US$9 billion stake in Daimler AG, the German maker of Mercedes-benz cars and trucks.
With the fall of Anbang, the Chinese government has sent a clear message to the market that it will crack down on the business expansions that rely on political connections and employ aggressive leverage.
As the Chinese government has now adopted high-quality growth as the core of its economic strategy, China needs to continue to step up its financial regulations to nurture a fair and healthy business environment that rewards innovation and entrepreneurship, instead of speculation and family connections. This is the only way China will develop a high-quality economy.
CHINA Is finally taking decisive action against serious and prevalent violations of financial regulations