Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's brief love affair with hostile takeovers could be coming to an abrupt end.

The country's insurance regulator is cracking down on the most active acquirers -- insurance companies -- by restricting their main source of firepower: sales of universal life policies that promise high returns.

The China Insurance Regulatory Commission this week suspended Foresea Life Insurance Co., a unit of Baoneng Group, for three months from selling these death-benefit-plus-savings products. The policies have helped propel upstarts including Anbang Insurance Group Co., the owner of New York's Waldorf Astoria hotel, into the ranks of China's top insurers by premiums this year.

Life Skills
Anbang Life has surged to become China's No. 3 insurer by premiums while unit Hexie Life is at No. 5
Sources: China Insurance Regulatory Commission, Credit Suisse
Note: Data is for January to October 2016.

The regulatory constraints not only imperil the insurers' growth prospects but also threaten to spoil the fun for China's small investors, who have been engaged in a treasure hunt for stocks seen as having the greatest takeover potential.

Companies such as Anbang and Foresea have embarked on a multibillion-dollar spending spree to swallow up assets capable of helping to fund the high returns they have guaranteed on universal life products. Targets have included everything from overseas real estate and insurance assets to China-listed companies with low returns on equity or big cash chests from which acquirers could wring higher dividends.

Enter China Vanke Co., the nation's biggest home builder. Baoneng, through Foresea and another unit, Shenzhen Jushenghua Co., has emerged as the biggest shareholder in the developer. Its approach was unsolicited, and Vanke's president has called it a hostile takeover.

Baoneng isn't alone in its pursuit: Several other insurers such as Anbang and China Evergrande Group's life unit have also been buying Vanke's Shenzhen-traded shares.

Foresea also has been buying shares in Gree Electric Appliances Inc., a Shenzhen-listed maker of air-conditioners and rice cookers known for high dividends and with a 134 billion yuan ($19 billion) cash pile that offers the potential for more.

Stocks of both targets have been on a tear in the past year, with Vanke climbing more than 40 percent and Gree gaining 27 percent. The two are among companies that Credit Suisse says have been chased higher by the bidding activities of insurers. 

In the Sights
Vanke and Gree, both targets of buying by insurers, have outperformed the Shenzhen benchmark index this year
Source: Bloomberg

While most of the nine insurance companies investigated by the regulator may have escaped sanction , more attempts to rein in the industry look likely. Months before Foresea was singled out, authorities had already started making universal life products harder to sell.

Moreover, there are signs of growing official unease over the spate of takeover activity, with acquisitions financed by borrowed money particularly in the cross-hairs. The stock regulator, usually a low-key presence, railed this week at purchasers that used improperly obtained money to conduct leveraged acquisitions, calling them "robbers of the industry." 

While China Securities Regulatory Commission Chairman Liu Shiyu didn't identify the companies, it's probably no coincidence that the comments came as Shenzhen's stock exchange questioned "abnormal trading behaviors" at companies such as Vanke. 

The tussle over Vanke has grabbed headlines precisely because hostile takeovers are so rare in China. If regulators get their way, it looks like they'll remain few and far between.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Sales by Evergrande's life unit were also restricted, the South China Morning Post reported.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net