Friday, March 23, 2018

Nationalising Anbang

The Chinese government’s takeover of Anbang last Friday and the prosecution of former chairman Wu Xiaohui for “economic crimes” set off a few alarm bells among foreign analysts trying to understand the move.

While the nationalisation of one of the country’s biggest insurers has drawn plenty of criticism, one Chinese lawyer says that the government is clearly making an effort to justify its actions under the country’s Insurance Law, which specifically gives the China Insurance Regulatory Commission (CIRC) authority to take over insurers that lack sufficient reserves or reinsurance, or use their funds illegally.

This can only be done if the company fails to rectify its behaviour after a CIRC inspection period, which in the case of Anbang started in June last year when Wu was first detained. Since then, the regulator has been “conducting in-depth inspections, strengthening on-site supervision and urging the company to improve its operation and management”, according to a statement.

However, the law also says that the regulator needs to disclose the reasons for its actions. This is a stretch. The brief CIRC statement says that the takeover is necessary because Anbang has been acting “in violation of laws and regulations and may seriously endanger the solvency of the company”.

It does not mention which laws or regulations the company has violated, but there are certainly fears about its solvency. At the beginning of the CIRC inspection last June, the regulator’s data showed that Anbang’s life unit, which had grown rapidly through the sale of controversial wealth-management products, had a solvency ratio of 101.3%. The group has not disclosed data since then.

At around the same time, the group sold at least Rmb6.64 billion of shares in the four biggest Chinese banks — Agricultural Bank of China, China Construction Bank, ICBC and Bank of China — prompting further concerns about its financial health.

Fears about Anbang’s solvency would satisfy the legal requirement for a takeover, according to the insurance law: “Where an insurance company violates the provisions of this law and impairs the public interest of society, by which it might seriously jeopardise or has already jeopardised its solvency, the insurance supervision and control authority may implement a takeover of the said insurance company.”

While there is clearly an attempt to make the takeover appear as though it is part of a normal regulatory process, few observers are convinced. The main problem is a lack of transparency. The charges against Wu have not been detailed and the solvency argument, which has not been supported by any disclosure, only really applies to Anbang’s life businesses rather than the entire group. The most recent data for the property and casualty business showed a solvency ratio of more than 400%, which is far higher than the industry average.

Some analysts have tied the company’s problems to its overseas acquisition spree, especially the high-profile purchase of the Waldorf Astoria in New York in 2015. However, Xi Jinping honoured the hotel with an official visit shortly after Anbang bought it and the government was encouraging Chinese companies to invest overseas at the time.

Needless to say, political machinations cannot be ignored. Just last week, Xi consolidated his leadership of the Communist Party by removing a two-term limit and allowing himself to become “leader for life” in the mould of Mao Tse-tung. The move comes after a multi-year corruption campaign that has sidelined many of his political rivals — including loyalists to former leader Deng Xiaoping, whose daughter is married to Anbang’s Wu.

Whatever the truth behind Anbang’s problems, its future is just as murky. CIRC says that it will take control of the company for a year, but it is anyone’s guess what will happen after that.

The statement says that the takeover team “will actively introduce high-quality social capital, complete the equity restructuring and keep the private nature of Anbang Group unchanged”. The “equity restructuring” presumably refers to the confiscation of shares from Wu — and perhaps other shareholders, who are mostly thought to be associates of Wu’s.

Assuming the company will not be returned to the original shareholders, a sale is the only real option. Indeed, it was reported in January that the government was in talks to sell Anbang to Central Huijin Investment, part of China’s sovereign wealth fund — or, in other words, the government was exploring the sale of Anbang to itself.

It remains to be seen what Anbang’s ultimate fate will be, but few would bet against it ending up in the control of a government-linked entity.


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