Usually, listening to public speeches by senior Chinese officials is a banal, sleep-inducing affair, as they tend to hide their feelings behind scripted lines of jargon and generalities. So when Liu Shiyu, the mainland’s top securities regulator, went off script last weekend and denounced Chinese insurers as “barbarians”, “robbers” and “sirens”, he set off a frenzied debate over the state and regulation of China’s unruly financial markets.
In a speech to a semi-official association of fund managers, Liu employed unusually strong and colourful language to target his anger at those fund managers who used improperly sourced funds to undertake highly leveraged buyouts and raise their stakes in blue chip companies. He said such acts were tantamount to challenging the bottom lines of China’s financial laws and regulations and professional ethics – a sign of decay in human and commercial moral values.
He did not name names, but obviously referred to those nouveau riche insurers primarily owned by private investors who raised billions of yuan through high-risk and high-return products to go after some of China’s best managed and biggest companies and signal their intention to force changes of management.
On the same day, Chen Wenhui, a deputy chairman of China’s insurance regulatory commission, echoed Liu’s comments saying that skirting regulations was tantamount to committing a crime.
The speeches suggested a concerted action by the central government to go after those insurers who the authorities believe have become a debilitating force to the stock markets rather than bringing the long-term stability they were supposed to provide.
On Monday, the insurance regulator said it had suspended Foresea Life, a unit of Baoneng Group, for three months from selling universal life insurance products which offered investors guaranteed, short-term high yields. Reports suggested the regulator would send teams of investigators to Foresea Life and the insurance unit of Evergrande Group, a property conglomerate.
As a result, the share prices of many companies in which the insurers had built stakes fell sharply last week as investors tried to make sense of the crackdown.
Supporters of the crackdown say it is long overdue. Some have compared the insurers’ leveraged buyouts (LBOs) to the boom of LBOs in the United States, which caused havoc in the financial markets. Some have cited the near collapse of American International Group, which was involved in risky bets on securities including infamous credit-default swaps. Indeed, a few of those mainland insurers have become the biggest speculators zooming into and out of shares of companies, causing turmoil and uncertainty in the stock markets.
Others argue insurers investing in listed companies can provide long-term stability to the stock markets and should not be demonised as a whole. The key is that there is a lack of detailed rules or a good regulatory regime, which allows some insurers to take advantage.
Indeed, over the past two years several of the new-money insurers including Foresea, Evergrande and Anbang have quietly built up stakes in blue chip companies through issuing high-risk, high-return products over the internet and through traditional retail channels. Initially, the regulators gave their tacit approval, partly because the central government officials held different views over those products. While some maintained those products were highly risky, others believed they were trial products of financial innovation – something to be encouraged.
But Foresea’s takeover battle regarding Vanke – the world’s largest home builder – has caught the attention of the mainland leadership and proved to be a game changer, as the ensuing acrimonious exchanges between Baoneng and Vanke management have made the Chinese leaders uneasy over such buyouts.
Baoneng said it relies on margin financing, derivatives and short-term investment products to finance share purchases. Moreover, there are suggestions Baoneng’s takeover, if successful, could trigger the departure of top management personnel at Vanke, which would severely hit its business operations.
In other instances, insurers have immediately forced changes of management at companies they have acquired amid disquiet that the changes were unnecessary and disrupted the business operations of those firms.
At a time when businesses in the real economy are encountering economic headwinds and immense downward momentum, insurers’ LBOs and forced changes of management have prompted the central leadership to take decisive actions to protect well-run companies. It takes decades to build a strong company like Vanke, but the insurers’ reckless moves could destroy it very quickly.
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The latest developments could prompt mainland leaders to take another look at the fragmented regulatory regime of the financial markets. China’s financial regulation is governed by sectors, with the central bank in charge of monetary policy and three regulators responsible for banking, securities, and insurance. Over the years, there have been suggestions the government should create a super-regulator for banking, securities and insurance.
There is little doubt that there will be more pressure on the central government to move in that direction, but creating such a super-regulator would take time even if consensus is reached. Ironically, the central government has long had something that acts like a super-regulator – its leading group on financial work, which is usually headed by a vice-premier in charge of finance in the cabinet. The purpose of this group is to decide on major financial policies and coordinate among agencies. The key is to stiffen the spine of the group and give it a stronger mandate to regulate the markets effectively. ■
Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper