Acquisitive Anbang's Chief Detained as China Cracks Down on Risky Finance

 | Jun 14, 2017 | 8:00 AM EDT
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The chief of the highly acquisitive Chinese upstart Anbang Insurance Group has been detained by Chinese authorities, according to Chinese media. The company is largely thought to have confirmed his arrest in a roundabout way.

Anbang issued a statement on its Web site saying that chairman Wu Xiaohui was "temporarily unable to fulfill his role" for "personal reasons."

Such statements are common in China when companies are forced to confirm the location of "missing" senior executives that are "helping authorities with their inquiries." Detentions and arrests in China are not public and they are rarely confirmed by the police.

Wu has authorized the relevant senior executives at the company to carry out his duties, Anbang states, meaning the business "is operating as normal."

The influential business magazine Caixin reported that Wu had been taken away by Chinese authorities on June 9, citing unidentified sources. That report has now been removed from its Web site.

Anbang said in the past it would sue Caixin for "untrue" reports about it and Wu, the respected news journal having written about cash shortages and regulatory violations at the company. Anbang also denied a June 2 report in the Financial Times that Wu was barred by Beijing from leaving China. 

Wu has been "assisting relevant investigations" for quite a while, according to the South China Morning Post, citing an unnamed source. But Wu had always come home after a few hours of questioning. This time, he has not returned.

The move comes as Beijing looks to curtail the business of "shadow lending" in China. The products in that system promise high returns to what are often small-time investors for putting money into dark pools of assets. Those may be subprime debts.

The Chinese leadership is also looking to prevent Chinese companies from overextending themselves with high-cost "trophy" purchases overseas. In many instances, such purchases have little to do with the core business of a company and more to do with the penchant of the founding tycoon. 

China is keen to encourage the expansion of its industries internationally, both for diversification and so that its companies gain experience of international standards. But Chinese companies regularly expand opportunistically and randomly. 

Insurers are of course supposed to project stability, so their acquisitions have come under special scrutiny. The insurance regulator has banned Chinese insurers from deals in which they are "financial investors", as well as from takeovers outside the insurance industry.

I explained on Monday how the Baoneng Group, a little-known conglomerate backed by insurance money, had launched China's highest-profile hostile takeover to date with a bid to buy China's second-largest property developer, China Vanke (CHVKF) . It appears to have lost after the local government stepped in to take control of Vanke.

China Evergrande Group (EGRNY) , which last year passed Vanke to become China's largest property developer, also built up a 14% stake in Vanke, funded in part by its insurance arm. Evergrande has now sold its shares to the government-owned operator of the Shenzhen subway system, where Vanke is based.

Baoneng may have drawn inspiration from Anbang, which was equally unknown in 2014 when it shelled out $1.95 billion to buy the Waldorf Astoria from Hilton Hotels (HLT) .

Neither of those deals is outrageous. Baoneng has a property arm that specializes in shopping malls. Although Anbang paid over the odds, it found a top-flight property that should produce stable returns for years.

However, both Anbang and Baoneng have also been banned from selling new insurance products in the past, for violations uncovered during regulatory inspections. They have favored "universal insurance" products that offer far more investment exposure than insurance itself.

Anbang also embarked on a bid for Starwood Hotels (HOT) worth almost $14 billion. Starwood appeared to favor Anbang's all-cash offer over a rival $13.6 billion bid from Marriott International (MAR) . But Anbang suddenly walked away citing "various market conditions," with local press reports stating again that Chinese state may have stepped in.

Little is known about who owns Anbang, which is not listed. There has been speculation in the media that it is backed by members of the political elite. The high-profile Wu married a granddaughter of Deng Xiaoping, the Chinese leader who began China's transition from a communist to capitalist economy.

With President Xi Jinping embarked on a fierce fight against corruption, the developments at Anbang are therefore at the nexus of two of Beijing's biggest concerns.

The communist leadership is concerned about public reports of the big-money business connections and holdings of its leaders. It is at the same time equally worried over the wisdom and funding behind corporate expansion.

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