Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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.

Wall Street's nickname for Richard Fuld, the erstwhile chief executive officer of Lehman Brothers Holdings Inc., was "The Gorilla." Nine years after the U.S. investment bank's collapse, the fate of another big beast of finance should be regarded with foreboding.

Beijing has told banks to cut some ties with Anbang Insurance Group Co., whose Chairman Wu Xiaohui is already in police custody, Bloomberg News reported Thursday. Given that almost 90 percent of Anbang's products are sold through banks, and around 44 percent are high-risk, this is no small thing.

Wu is the Godzilla of the middle kingdom's finance industry, having built Anbang into an opaque franchise with $294 billion in assets -- stuffed with highly leveraged acquisitions from hotels in New York to insurance businesses in South Korea and Belgium.

Investors can only hope President Xi Jinping has ordered enough cushioning material to prevent the ground from shaking if this monster goes down. Bonds of Vivat NV, the insurer Anbang bought from the Dutch government in 2015, are already starting to crumble.

Chinese Burn
Bonds of Vivat, the Dutch insurer acquired by Anbang, have plunged
Source: Bloomberg

While Anbang's assets are less than half those of Lehman in 2007, the unlisted Chinese insurer may be no less systemically important. By hawking products that slap some death benefits on top of a tantalizing investment return, it went from practically nowhere to surpass giants such as Ping An Insurance Co. By the end of the first quarter this year, Anbang had become the country's second-largest insurer after state behemoth China Life Insurance Co.  

But is it really an insurer? If Lehman was an investment bank with a limited set of counterparties -- one of the reasons regulators foolishly let it fail -- Anbang is a big cog in China's gigantic wealth-management wheel.

Any scramble by the public to exit products like Anbang Long Life of Happiness #5 Annuity Insurance could put to the test the 207.8 billion yuan ($30.6 billion) of cash reserves the company lists at its life-insurance unit as of the end of April, a month in which premium income fell 88 percent from a year earlier. In May, the insurer was banned from issuing new products for three months, but could continue to sell old ones. Telling banks to sever ties has effectively cut off that flow, too.

Life Was Beautiful
Anbang Life's premium take fell 88 percent year-on-year in April
Source: Bloomberg Intelligence

A sell-off in Anbang-owned stocks shows investors aren't taking the company's denial of a liquidity crunch at face value.

Xi is flexing his muscles ahead of the Chinese Communist Party's 19th Congress. Liquidity conditions in China are tight, and the wealth-management taps that the president now wants to turn off slosh into buckets that meet corporate credit demand. He may have taken behind-the-scenes steps to contain the fallout, which could get nasty if irate customers try to put banks on the hook for policies they have sold.

In 2014, state-run China Huarong Asset Management Co. took over Credit Equals Gold after the wealth-management product marketed by Industrial & Commercial Bank of China Ltd. came close to a default. Cutting Anbang down to size won't be as easy as bailing out a $488 million fund. It could nonetheless be the most powerful signal yet of Xi's determination to deleverage.

Has he done the math on risks and rewards right? That's the real 800-pound question.

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

To contact the authors of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

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