A Deal Too Far For China’s Anbang

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As recently as a few months ago, Wu Xiaohui was still receiving visitors late into the night in the Royal Suite at the Waldorf Astoria hotel, once the New York residence of the Duke and Duchess of Windsor, where he would offer them fine Chinese and Japanese teas and silver platters laden with fruit.

Mr Wu’s insurance conglomerate Anbang acquired the hotel from Blackstone in 2014 in one of the most high-profile international deals involving a Chinese company.

Three years later, the hotel is closed for renovations and the Chinese tycoon’s fortunes have changed dramatically: he has been detained by corruption investigators in Beijing, according to people familiar with the investigation.

Neither China’s Central Commission for Discipline Inspection nor its insurance regulator have officially confirmed that Mr Wu is in legal jeopardy as they investigate him for money laundering and other alleged crimes, making it possible that he could be released without charge. But for now, he ranks as the most high-profile Chinese business tycoon to be caught up in the country’s anti-corruption sweep.

The apparent fall of Mr Wu has shone the spotlight on a particular brand of Chinese capitalism that has taken root in parts of the financial industry, one which involves freewheeling risk-taking, obscure ownership and political connections. A financial regulator complained earlier this year about “barbarians” in the insurance sector.

It also represents a rare foray for President Xi Jinping’s swirling anti-corruption campaign to target someone connected to Communist party royalty, given that Mr Wu married a granddaughter of Deng Xiaoping, China’s late paramount leader.

Mr Wu’s rise was almost as vertiginous as his apparent fall. Over the past five years, his group’s annual premium income has soared from Rmb26bn ($3.8bn) in 2013 to Rmb504bn last year, providing the financial platform for domestic and overseas acquisitions totalling almost $20bn since late 2014, as well as stakes in Chinese listed companies worth $155bn.

Controversially, many of the financial products marketed by Anbang and its rivals over recent years were not traditional life insurance, but risky investments promising high returns. Investors, starved of returns outside of the country’s increasingly unaffordable urban property markets, snapped them up, with many believing the government will bail them out if necessary.

Rupert Hoogewerf at the Hurun Report, which tracks the fortunes of China’s richest men and women, compares China’s insurance industry to “that room at the back of the casino where the big whales play”. He adds: “Access to this room is very hard to come by.”

Making connections

Mr Wu, 50, has spent his entire adult life seeking access to China’s inner sanctums. He was born and raised on the outskirts of Wenzhou, the south-eastern city that has been a hotbed of Chinese entrepreneurship, where he founded an auto dealership in 1996 before branching out into automotive insurance and other financial services.

Within a decade Mr Wu had relocated his booming business to Beijing and was soon mingling with some of the country’s most powerful families. Sometime after 2004, he married Zhuo Ran, a granddaughter of Mr Deng. According to two people familiar with the marriage, the couple have two young children. Last month, Mr Wu denied reports that they had divorced.

It was not the first time he had married up. A previous wife had been the daughter of a Zhejiang vice-governor. But his union with a Deng “princeling”, the popular term for children and grandchildren of the leaders of China’s Communist revolution, gave many the impression that Anbang had powerful political allies.

As the son of a senior government official, Mr Xi is himself a hong er dai or “second-generation red”. Wang Qishan, who heads Mr Xi’s anti-corruption campaign, also married the daughter of a revolutionary elder. Some critics of the campaign argue that it has brought down relatively few princelings.

Mr Wu did not just marry princelings; he also hired them. According to corporate records, Anbang board members have included the sons of both a former military commander and a former premier.

One banker who has dealt with Mr Wu argues that any sense of security he may have felt from surrounding himself with princelings, especially those who came of age before Deng began to reform and open China in the late 1970s, was a false one. “Many of them are not as influential as people think they are,” the banker says. “They are also not that sophisticated when it comes to corporate and international finance.”

Mr Wu took pride in his relatively humble origins and retained a strong Zhejiang accent. Friends and associates say he would describe himself as a “self-made man” and “fighter” who delighted in meeting successful people with similar life stories.

They also say that he boasted of his appetite for big-brand acquisitions. “Everyone’s life has meaning,” he told a small audience earlier this year. “If you are only a little cog in a machine doing the same thing every day, you are wasting your parents’ gifts.”

Anbang’s most famous acquisition — the $1.95bn purchase of the Waldorf — cemented Mr Wu’s reputation as one of China’s most hyperactive dealmakers. He frequently appeared in New York, sometimes staying only a few hours before departing in his private jet to a new destination in search of a new deal, leaving his harried staff to cancel appointments and apologise for the sudden change of plans.

Mr Wu became close to Jon Gray, head of Blackstone’s real estate group and heir apparent to its founder Steve Schwarzman. Anbang recently paid $5bn for a portfolio of Blackstone residential properties in Japan.

Mr Wu almost topped the Waldorf deal in March with an agreement to invest in a Manhattan office tower owned by the family of Jared Kushner, Donald Trump’s son-in-law and adviser. According to one person close to Mr Wu, he told colleagues that he was keen on the deal because, just as the ruling Communist party would always prevail in any clash with private business interests in China, he believed that in the US money could buy power. The person added that it was the Kushners, not Mr Wu, who broke off talks a few weeks before Mr Trump and Mr Xi held their first summit meeting in early April.

Initially, the rapid expansion of insurance companies in China — and their purchases abroad — appeared to enjoy official blessing. The same year that Mr Wu bought the Waldorf, China’s State Council issued a formal decree encouraging insurers to invest abroad. Insurance groups, it said, should “try many forms, and many paths, in ‘going out’”.

More importantly the CIRC also scrapped a 2.5 per cent cap on guaranteed returns that insurers were allowed to offer investors, resulting in a proliferation of high-yield, high-risk investments.

“The regulator allowed insurance companies to invest in risky assets,” said Andrew Collier, managing director of Orient Capital Research. “This led them far afield from their traditional insurance business with few risk controls.”

Beijing backlash

In the first sign that the tide was beginning to turn for Mr Wu, Anbang was forced to abandon a $13bn bid for Starwood Hotels & Resorts in March 2016. The US group had expressed concerns about Anbang’s funding for the deal and uncertainty about whether it could secure the necessary regulatory approvals in China.

Mr Wu’s firm was too opaque to list overseas or get a good enough credit rating to issue debt abroad. According to people inside Anbang, he simply could not or would not provide the information about his shareholders that foreign regulators and rating agencies demanded.

Dozens of Chinese companies’ offshore acquisitions have fallen through since strict foreign exchange controls were implemented last year without their executives later being detained by corruption investigators. Mr Wu’s current legal problems are instead related to a renewed focus by Chinese authorities on financial risks at home, especially in the insurance industry.

“CIRC was too concerned with expanding the insurance sector [in order] to support economic growth,” says one person close to the investigation into Mr Wu. “You cannot play this game forever. The sector had to be downsized.”

“The government wanted to make an example of Anbang,” adds Zhang Lifan, a Beijing-based political analyst.

In December Liu Shiyu, the head of China’s securities regulator, accused some insurance companies — which he did not name — of borrowing and investing recklessly. Xiang Junbo, Mr Liu’s counterpart at CIRC who previously encouraged the use of leverage in the industry, promised a crackdown. But his change of heart came too late: he was detained in April for alleged corruption.

According to Caixin, a Chinese financial magazine, there is plenty for investigators to look into at Anbang. In late April it alleged that Anbang had “faked” a $9bn increase in its registered capital in 2014. Anbang denied the allegation and said it will sue Caixin.

Mr Wu, however, may now struggle to carry through on that threat. Recently asked by a friend where Anbang would be in three years’ time, Mr Wu declined to speculate. “Life can end suddenly,” he said. “I focus on the present.”

Source: FT

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