Finance and economics | Out with a whimper

The rapid rise and fall of the Anbang empire

China’s government takes control of its would-be financial colossus

RARELY in corporate history has a giant come and gone so quickly. Anbang was founded in 2004 as a small Chinese car-insurance company. By the start of last year it ranked among the world’s biggest insurers with some $300bn of assets, including stakes in hotels and financial firms across America, Europe and Asia. Given another ten years, boasted Wu Xiaohui, its swashbuckling founder, Anbang’s scale would “exceed your imagination”. But then, just as vertiginous as its ascent, came its fall. Alarmed at its debt-fuelled expansion, regulators started blocking its overseas deals, reined in its insurance business and detained Mr Wu. On February 23rd its disgrace became complete: the Chinese government announced that it had taken over Anbang and would prosecute Mr Wu for economic crimes.

The insurance regulator said it had intervened because illegal operations could have “seriously endangered” the company’s solvency. It did not spell out the exact nature of Anbang’s alleged offences, but it has been clear for at least a year that the two core features of its business model would no longer be tolerated. The first was its method of raising cash. Anbang sold high-yielding, short-term investment products in the guise of insurance, turning what should have been the safest corner of the financial system, the insurance sector, into one of its most dangerous.

The second was what it did with that cash. It was an aggressive, some say foolhardy, investor overseas. It paid $2bn for New York’s Waldorf Astoria hotel and $6.5bn for hotels owned by Blackstone Group, the world’s largest private-equity firm. When Xi Jinping, China’s president, last year called for a crackdown on “financial crocodiles”—companies seen to be destabilising the economy with excessive borrowing and reckless investments—Anbang’s misery deepened. Other high-flyers, notably HNA and Wanda, two of China’s biggest private conglomerates, have also faced close scrutiny and are selling off assets to repay their debts. But none has come under as much pressure as Anbang.

One reason that Anbang has been treated so harshly may be that it has fewer defenders in high places. State-owned banks are some of the main creditors to HNA and Wanda, whereas Anbang has relied more on premiums from its insurance sales. But that raises a question: why did regulators allow Anbang to get so big in the first place? For a time, Mr Wu appears to have had powerful backers. He was married to the grand-daughter of Deng Xiaoping, China’s revered former leader. He also was reputed to have a close relationship with Xiang Junbo, the top insurance regulator during Anbang’s dizzying rise. Yet nothing is permanent, not least in Chinese elite politics. In 2015 Caixin, a respected Chinese financial magazine, reported that Deng’s grand-daughter had separated from Mr Wu. And early last year Mr Xiang was detained for corruption.

When Anbang’s reputation in Beijing started to fray, it looked to cultivate connections in another capital: Washington, DC. It entered talks with a company owned by the family of Jared Kushner, Donald Trump’s son-in-law, to invest $400m in a New York skyscraper. It looked as though Mr Wu was trying to prove his worth to Chinese officials by having a direct line, or just about, to Mr Trump. But this last bid at saving his career, if that is what it was, came up short. A flurry of media reports examining the deal and the potential conflict of interest led the two sides to break off talks.

Mr Wu was once lionised in Chinese media as a master of the “Warren Buffett model”, drawing income from insurance premiums to assemble a strong, diversified investment portfolio. This was always far-fetched, with Mr Wu far more reliant on debt and far less disciplined in his deal-making. But one crucial question in the months to come will be whether, despite all the evidence of rashness, he actually managed to spend some of Anbang’s cash shrewdly. This will help determine how successful the Chinese government is in unwinding its excesses without causing widespread collateral damage.

The regulators’ stated goal is to manage Anbang for one year, stabilising its operations and attracting new investors in order to return it to private hands. The real goal, according to two executives with other insurers, is to pay off policy-holders and honour its debts by finding buyers for its assets. Although it might have overpaid on many of its international forays, it bought into domestic banks and property developers when they were priced more cheaply. Its stakes in Minsheng Bank and Merchants Bank, two of the country’s top commercial lenders, will be sought after by other insurers. Regulators could sweeten the deal further by letting them issue special bonds to finance these acquisitions.

If the process is handled well, Anbang could be all but wound up by next February. It would return to where it began barely a decade ago, a small player on the periphery of China’s financial system, not the colossus at its heart of which Mr Wu dreamed.

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