Anbang Takeover Sends Blunt Message: China Wants to Fix Its Debt Problem

BEIJING — China’s top leader has a message for his country’s biggest deal makers that could reverberate throughout the financial world: Get with my economic program — or else.

The Chinese government on Friday seized control of Anbang Insurance Group, which once represented the country’s ambitions to go global. It also charged Wu Xiaohui, Anbang’s high-flying and politically connected former chairman, with engaging in fraudulent fund-raising and taking company assets.

The action casts a pall over a corporate empire that extends far beyond China and includes the storied Waldorf Astoria hotel in New York, major financial firms in South Korea and the Netherlands and properties worth billions of dollars elsewhere around the world.

By taking action against Anbang, China’s government may give regulators in other countries new reasons to question the political connections and financial backing of Chinese companies hoping to make overseas deals, lest Beijing emerge as an unwelcome new landlord should times get tough.

Seizing control of Anbang also makes a forceful statement about Beijing’s priorities. It shows China’s companies, banks and the other pillars of the country’s economy that Xi Jinping, who will begin his second term as president next month, has embraced financial stability and is serious about curbing China’s addiction to debt.

“All of the animals have now witnessed Wu’s pyre,” said Brock Silvers, the chief executive of Kaiyuan Capital, a Shanghai investment advisory firm, “and everyone in the zoo now understands the message.”

The move is a major reversal for the Chinese forces that have transformed global markets and industry.

In recent years, Chinese money has helped drive up the prices of real estate, oil fields, hotels and just about any other asset that big companies buy and sell. The purchases have included the strategic (global agribusinesses and energy companies) and the prosaic (movie theaters and video games). Any slackening in the pace of buying could cool deal making and disappoint investors who have reaped windfalls thanks to profligate Chinese spenders.

The buying binge could not last. Many of China’s deals in recent years depended on cheap borrowing, and Chinese officials have become increasingly nervous about debt. China borrowed heavily to fuel a decade of growth, accumulating trillions of dollars of debt that put it on a level comparable to the United States, relative to overall size of the two countries’ economies.

Chinese officials appeared reluctant to pare back debt at the risk of curbing growth and provoking unrest — until now at least. Since Mr. Xi consolidated his power at an important Communist Party meeting in October, Chinese officials have gotten more vocal about tackling the debt issue, and have threatened to crack down on the worst offenders.

In a statement, Anbang said it supported the takeover and would remain private, despite government oversight.

“Our business and operations are stable,” the statement said. “We are confident that this stable operation will continue under the interim management working group and in the long term.”

Chinese state media and other official channels provided little guidance on Friday about why Beijing had taken over Anbang or what government ownership might mean. Experts said such a drastic step would have required approval at the highest levels of government.

Anbang is in some ways a fitting example of what might be called China Inc. Begun as a modest car insurance company in 2004, it used cheap debt and financial engineering — sometimes borrowing directly from individuals with promises of big returns — to build a financial juggernaut in just a few years. Risk may have built Mr. Wu’s empire, but it also led to the company’s downfall.

Anbang has personified a freewheeling type of Chinese deal maker. Called “gray rhinoceroses” in China, Anbang and companies like Dalian Wanda Group, Fosun International and HNA Group bought up billions of dollars worth of properties.

The push appeared to enjoy official approval initially. Mr. Xi stayed at the Waldorf Astoria during a stop in New York three years ago.

Now, under official pressure, many of the companies are unloading assets. Dalian Wanda last year shed billions of dollars worth of property investments. HNA is now selling properties amid analysts’ questions about how it will meet its heavy debt obligations.

Before the Anbang takeover, many Chinese regulators had been hesitant to act aggressively, and the pace of enforcing discipline had been slow. By seizing control of the company rather than engineering a quiet injection of cash from a pliant state company, the Chinese government may have hoped to set an example.

“Xi’s concern about financial risk has had a lot of impact on the behavior of a lot of banks, regulators and companies,” said Victor Shih, an associate professor at the University of California, San Diego, who studies Chinese politics and finance. “You have seen the regulators being very cautious, and being maybe more pre-emptive than they would have been without this political pressure from the highest levels.”

Despite the government pressure, Chinese deal making is unlikely to completely end, given the country’s vast sums of money and global ambitions. China has continued to support acquisitions in strategic areas like energy and technology. One company widely considered a gray rhino, Fosun, said this week it had acquired a majority stake in Lanvin, the French fashion house.

China’s ambitions, though, are likely to attract renewed scrutiny. Regulators in the United States and elsewhere have been asking tough questions about who is backing Anbang and other acquisitive Chinese companies. Some lawmakers and White House officials support broadening the authority of regulators who review takeover offers. Anbang’s problems, and Beijing’s move against the company, bring the questions about ownership and stability to the fore.

“Anyone who knows anything about China knows the nature of the party and state and the opacity of company ownership,” said Fraser Howie, a former banker in Asia who has co-written three books on the Chinese financial system. “There was never any excuse for not asking the difficult questions. A lot of foreign regulators just skipped over them and were far too relaxed in their approach.”

More than $4 billion worth of deals by Dalian Wanda, HNA and Fosun, including some in China, await approval, according to Dealogic, a data provider.

It is not clear what will happen to Anbang’s overseas properties, including the Waldorf Astoria, which is undergoing an expensive renovation. Anbang spent $15 billion on high- profile overseas deals from 2009 to 2017, according to Dealogic. The acquisitions included well-known hotels in London, Manhattan, Mexico and Paris; insurance companies in South Korea and the Netherlands; and even a stake in Woori Bank, once among South Korea’s largest lenders. Woori could not be reached for comment.

One of the companies snapped up in the spree is Vivat, a Dutch insurer that Anbang bought from the Dutch government for 150 million euros in 2015. As part of the deal, Anbang pledged to pump up to 1 billion euros into Vivat and to take on 552 million euros of debt, a move hailed by Chinese media at the time as a heroic step toward bringing the insurer back from the brink of bankruptcy. The fate of that effort is now unclear.

A Vivat spokeswoman said that “as for now” the government takeover of Anbang would “not affect Vivat or its clients.” She added that the insurer was subject to Dutch laws and regulations and monitored by Dutch supervisory authorities.

Anbang once appeared immune to problems. Mr. Wu enjoyed strong political connections, and the company became well known and well respected in China in recent years.

But as official skepticism of Anbang grew, so did public skepticism.

A month ago, a lacerating commentary entitled “Goodbye Anbang” spread widely on Chinese financial news websites and on social media platforms.

“The biggest problem here is not the pursuit of profit by capital, it’s how you were able to grow so fat overnight,” said the commentary. “This is not playing by the market rules. It’s the scams of privileged wealth.”

Content originally published on https://www.nytimes.com/2018/02/23/business/anbang-china-xi-deals.html by KEITH BRADSHER, ALEXANDRA STEVENSON and CHRIS BUCKLEY