A butterfly flaps its wings in Patagonia… and there’s a cyclone in (say) Pattaya. It’s the same thing with money – and Anbang, as I’ll get to in a second.
The contagion effects of the 2008-2009 global economic crisis spread around the world. And so did the medicine that was poured down the throats of economies around the world: Cheap money policies and government spending staved off financial death, in most cases. But we’re now seeing side effects that were not envisaged at the time.
Economies around the world have experienced sharp recoveries and record prices in financial assets, equities, bonds and real estate. This has brought on a resurgence in global debt, most importantly in governments around the world.
And China has been a big participant in the global liquidity injection…
The Chinese lending spree
In 2009, China turned the national lending taps on in a big way, with total lending in China growing by more than 70 percent since then. And debt has grown… since 2009, China’s total national debt has risen from around 150 percent of GDP, to around 260 percent today.
This lending growth has pushed Chinese companies to invest offshore. Since 2014, there has been a flood of investment in foreign markets from a broad range of companies in China, both state-owned enterprises and private organisations. Chinese foreign investment in the U.S. alone jumped by close to 200 percent from 2015 to 2016.
Of all the dozens of Chinese companies that have sealed investment deals around the world, Chinese conglomerates HNA Group, Wanda Group, Fosun International and Anbang Insurance Group have featured most prominently in this rush of capital allocation abroad.
The sheer number, size and diversity of their deals – from football clubs, hotels, entertainment acquisitions, movie studios and large scale commercial real estate – has been astonishing. For example, in 2014, Anbang acquired the bastion of American modern urban history, the Waldorf Astoria hotel in New York, for US$1.95 billion. It was the highest price ever paid for a single U.S. hotel.
Chinese authorities have been concerned about this flurry of investment and its implications for the country’s reserves – and the companies themselves.
That’s why the government has worked to curb capital outflows, lending for offshore ventures and non-strategic investments in companies like the above (we told you about the crackdown here). And it was almost inevitable that one of the companies the government would target would be Anbang.
What makes Anbang special?
Anbang is a story of a rapid and massive build up of financial risk that could affect millions of ordinary people in China if it goes wrong.
Let me explain…
Today, Anbang is China’s second- or third-largest insurance company. It’s not a listed company, and it’s not clear who owns it (the New York Times has reported that the majority of shares are owned by its past chairman Wu Xiaohui, his wife and members of the family. High level political connections are also cited in various reports).
Anbang started life as a middling property and casualty insurer. By 2012/2013 it started dipping a toe into the water of life insurance. Then, in 2014/2015, it plunged head-first into the life insurance business. During this time, its premium revenues grew by around 650 percent, all from life insurance products.
But Anbang’s insurance products are not your typical standard life insurance policy taken out by a family for financial protection in the event of death. The company has specialised in selling short-term, high- coupon wealth management products wrapped in an insurance overcoat.
Anbang has aimed to meet huge demand in China for wealth management products that are of relatively short duration but have higher returns than bank deposits. These insurance-based products are often short term – sometimes just a few months – with low penalties for the early surrender of policies. That means investors are tempted to surrender the polices and chase alternative products on offer.
So Anbang has taken in large sums of money through these short-term insurance products. And this surge of income has funded its splurge on acquisitions at home and abroad – in long-term, big-ticket, illiquid assets like hotels, clubs and real estate.
This kind of investment produces a mismatch problem that some banks and other financial companies have run into in other parts of the world. They take in money on a short-term basis, and invest in or lend to longer-term assets. So a surge in withdrawals can produce a liquidity crisis for these companies. They just don’t have the cash to pay – and they can’t raise cash by selling, say, a US$2 billion hotel overnight.
So what happens to Anbang in a few years if (when) a flood of “policy” holders exercise their right to redeem? It could also face a liquidity crisis.
Angang has gotten itself into hot water before. Last year, the authorities directed some banks to stop some business activities with Anbang. In June, it was reported that at least six banks had stopped selling Anbang’s life insurance policies through their branch networks. And last May, the Chinese authorities stopped Anbang’s life insurance operation from selling any new products for three months. The authorities suggested that the company had breached insurance regulations. Given that around 90 percent of Anbang’s life insurance policies were sold by banks, this put a knife in the back of the business.
It is unclear what extent banks have reinstated operating relationships with the company. But it has been reported that Anbang has not sold new life policies since the beginning of the second qurter of last year. Nevertheless, as of November, the company still ranked number three in terms of cumulative life policy premium collections in China and had grown collections by almost 66 percent in the previous year.
The regulator steps in
With all this trouble, the Chinese government recently took over the company’s operations.
As a government or a regulator – anywhere – this kind of decision is a tough one.
Should authorities stand back and let the obviously flailing company carry on over the financial cliff, with all the collateral damage that would bring (in this case, to millions of people)? This might serve as a valuable lesson to investors who sought these kinds of returns and to the banks that funded the insurer.
Or should authorities step in to pre-empt the disaster from happening and perhaps install safe mechanisms to prevent this kind of thing in the future?
The pain of a crash would be deep and widespread with unforeseen contagion effects. And just about the last thing that China’s government needs is a blow up in a huge financial company that will drive millions of people into the streets in protest, and demanding recompense.
So the Chinese government decided to take things over – as a temporary measure, the authorities promise.
The obvious analogy
The situation is similar to the U.S. financial system prior to 2008. U.S. authorities only reacted when disaster struck, and they were forced to take dramatic emergency action, which involved bailing out systemically important organisations – banks and insurance companies in particular.
But perhaps that might not have been needed if U.S. authorities had stepped in earlier, like what China’s authorities have done in the Anbang case.
And it’s not just Anbang… Chinese authorities have been working for about 18 months to rein in debt excesses, the explosion of foreign investment and the huge wealth management/shadow banking system with its dubious, risky lending and investing practices. And it’s working. The pace of debt expansion has slowed. Capital outflows have also slowed and the nation’s reserves are now growing again.
In short, China is serious about curbing financial excesses in its system. It’s acting pre-emptively to stop another disaster like what we saw in 2008. This should reduce the risk of a financial crisis in China… as well as be positive for bank stocks, as it suggests a derisking of the financial system.
So in this case, prevention may be better than the cure. Markets, on balance, seem positively disposed to this intervention.
