‘Too Big To Fail’ Or ‘Too Close To The Sun’? Anbang And China’s ‘Near-Lehman’ Miss

How you view Beijing’s decision to step in on insurer Anbang depends largely on how you view China’s approach to “markets” (scare quotes there for a reason).

CIRC is taking control of Anbang (which owns the Waldorf and other trophy assets across the globe) starting today and ol’ Wu Xiaohui is being prosecuted for “economic crimes”, an amusingly vague charge that was tipped last year when he was detained by investigators who, according to people familiar with the probe, refused to say exactly what “economic crimes” means.

China has been zeroing in on Anbang as a potential source of systematic risk for quite a while. Last year, prior to Wu’s detention, the company was banned from issuing new products for three months after the CIRC got pissed about “Anbang Long Life of Happiness #5 Annuity Insurance”, a “long-term” annuity that promised returns after just two years.

And see that right there gets at one the fundamental problems here. CIRC said that product “evaded regulations” and “wreaked havoc on market order”. Stripped of the amusing hyperbole that characterizes China’s official pronouncements on shit that is dangerous, the bottom line is that Anbang’s model was a maturity mismatched nightmare. Duration mismatch doesn’t work forever and unfortunately, China’s  labyrinthine shadow banking complex is chock-full of it.

That’s at the heart of this issue. And that is the only excuse Xi needs to step in here. Just kind of deliberately glossing over the details in order to give you a basic idea of the problem, issuing what amounts to short-term paper and using the proceeds to buy up shit like hotels is a recipe for disaster and some might even call it outright fraud. Because you know, if you promise people their money back in say, six months and for whatever reason you can’t issue new products or roll the existing paper, well then you’ve got a problem when everyone comes asking for their money and you’ve bought a goddamn hotel with it.

“A Beijing-based lawyer who works with the CIRC and other regulators said senior officials at the insurance regulator had been watching Anbang closely since last year as its liabilities from the sale of shadow banking products grew, raising questions about the company’s solvency,” Reuters notes.

“The group has become too big to fail in some sense,” the lawyer said.

So, Xi is going to go ahead and try to head off the end game by simply taking this thing over. Anbang also has holdings in some public companies and I guess it’s conceivable it will have to sell those although given that it’s effectively Xi himself running the show here, there is exactly no chance that’s going to be disruptive to markets and really, I suppose it’s feasible that the fabled “national team” could actually absorb some of whatever Anbang might need to offload in that regard.

Of course the other thing this does is send a message to Chinese companies from Xi about flying too close to the sun. If what you want to do is go nuts selling duration-mismatched hand grenades while levering up and buying foreign hotels at a time when you damn well know Xi is still cracking down on corruption and trying to root out systemic risk from the financial system by reining in leverage, well then don’t be surprised when your ass lands up in jail. Even if you married a granddaughter of Deng Xiaoping. And see there’s another part of this story. Here’s The New York Times:

Mr. Wu was once a major figure in Chinese business circles. He had married a granddaughter of Deng Xiaoping, China’s paramount leader in the 1980s and a towering figure in Chinese politics, and he was widely considered politically connected. But he was detained in June, suggesting that any political sway he might have once held had ebbed.

Mr. Wu also tried to extend his political ties into the United States. In November 2016, he met with Jared Kushner, the son-in-law and a top adviser of then President-elect Donald J. Trump, in a bid to buy a stake in a Manhattan office building partly owned by Mr. Kushner’s family company. The deal was eventually abandoned after media coverage.

Some folks who spoke to Reuters for the article linked above, said that in their mind, this has “more to do with Anbang’s behavior than systemic financial risks” and that “the government had been effectively running the company since Wu was detained and the timing of the official takeover was linked to the months-long investigation into Wu, which was nearly complete.”

If you go back and look at the whole Caixin kerfuffle, you can kind of see how the tide was turning against Anbang.

Caixin published an investigative piece last spring and if you go back and read an FT article that was published around the time Anbang was banned from issuing new products, you’ll find this:

The suspension comes as Anbang is also engaged in a high-profile spat with Caixin, a respected financial news publisher, over an exposé alleging that the insurer’s huge 2014 capital injection was “fake”. Anbang has denied the allegation and stated its intention to sue Caixin and its chief editor.

[…]

Anbang chairman Wu Xiaohui is married to a granddaughter of Deng Xiaoping, the architect of modern China, and the company is widely believed to have powerful backers in Beijing. An Anbang spokesman declined to comment on Friday.

But political observers say privately that the decision by Caixin Рwhose chief editor, Hu Shuli, also has strong relationships with Communist party officials Рto publish its expos̩ suggests that the political winds are shifting against Anbang.

Again, this motherfucker Wu flew too close to the sun and thanks to the fact that in the process, he created something that could conceivably be characterized as a systemic risk, he made the decision to step in all the more easy for Xi.

So coming full circle, how you view this depends on what you think about state intervention to curb risks and also about the extent to which you’re willing to give Beijing the benefit of the doubt with regard to what their overriding motives are here.

For right now, it looks like the consensus from nearly everyone is that this was a good idea. “The takeover of Anbang by CIRC also means that Anbang would be unlikely to go bankrupt or face a liquidity run,” Citi writes on Friday morning, adding that “this in turn would avoid the systemic risk that some investors worried about previously.”

So that’s that. For now, anyway.

Now clap for Xi. Before he throws your hotel-buyin’ ass in jail for unspecified “crimes”…