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China economy

Government takeover of Anbang Group breaks new ground

To head off a corporate collapse that could have knocked confidence in China’s economy, the state has effectively gone into the insolvency business, with regulators taking charge of the insurance and investment conglomerate while it restructures

PUBLISHED : Monday, 26 February, 2018, 1:38am
UPDATED : Monday, 26 February, 2018, 1:38am

President Xi Jinping has declared that financial stability is critical to national security. This put on notice big companies that have over-leveraged themselves to expand too quickly, especially through buying foreign assets. A number have been divesting or pulling out of deals. But the most significant evidence of Beijing’s concern is a government takeover of Anbang Group that breaks new ground.

To head off a corporate collapse that could have knocked confidence in China’s economy, the state has effectively gone into the insolvency business, with regulators taking charge of the insurance and investment conglomerate while it restructures and tries to trade its way out of difficulties over a year or two.

Regulators remove Anbang chairman Wu Xiaohui for ‘economic crimes’, take over conglomerate 

Anbang is a casualty of Beijing’s crackdown on a corporate splurge on overseas assets that was once encouraged. It became the avenue for a massive outflow of capital, financed by easy borrowing from state banks, that poses a risk to financial stability. A parallel is to be drawn with Japan’s ill-fated corporate shopping spree in the 1980s, including the purchase of trophy assets, such as Anbang’s US$1.95 billion purchase of New York’s Waldorf Astoria hotel.

Announcing the takeover and the removal of Anbang chairman Wu Xiaohui, already under investigation for suspected economic crimes, the China Insurance Regulatory Commission said illegal operations at Anbang might have seriously endangered the company’s solvency, prompting the government to act under provisions of the Insurance Law. The watchdog will run the group for a year along with the central bank and other regulators to maintain operations as a private company.

The takeover is a way of handling too-big-to-fail companies that reduces financial risks and the danger of collapse affecting all shareholders and markets. It keeps them running as normally as possible even while investigations go ahead, without affecting debts and liabilities and obligations to shareholders, and in this case helps protect the interests of the many insurance policyholders, also important for social stability.

Anbang had become typical of China’s leverage issue, borrowing from state-owned banks that lent freely because of the borrower’s perceived political connections or dominance in its field. The transfer of the money overseas for acquisitions of foreign assets left unacceptable risks with the banks and the financial system.

Who’s next after Beijing prosecutes Anbang chairman Wu Xiaohui?

Vested interests that benefited from such activities worked actively behind the scenes to resist reforms. Beijing needed to take them down, but the conglomerate was so heavily leveraged that doing so without taking over the whole operation could have caused a systemic aftershock in the world’s second-biggest economy. In this respect, the Anbang situation may set a precedent for handling similar cases.