Finance

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.

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Anbang Insurance Group Co. might be the latest private company to come under Chinese regulatory scrutiny, but the government is the party that looks like it's in trouble.

That the acquisitive firm may be forced to sell overseas assets it had gobbled up with funding from its vast insurance proceeds, including New York's Waldorf Astoria hotel, is a new wrinkle in officials' attempts to rein in the dealmakers that pushed billions of dollars of capital offshore: Anbang Chairman Wu Xiaohui has been detained by authorities since June 9 and Beijing hasn't exactly kept quiet about its distaste for the fleeing funds. 

It is one thing to crack down on future transactions, as has been done with other prolific dealmakers such as Fosun International Ltd. Or even to intervene in local business, as with Dalian Wanda Group Co. It's quite another to inject the state into already-closed private deals abroad. 

Deal Boom Goes Bust
After buying New York's Waldorf-Astoria Hotel in 2014, Anbang went on an overseas acquisition spree that drew ire of Chinese authorities before halting dealmaking this year
Source: Bloomberg

While authorities didn't specify a timeframe, Anbang has been asked to sell its overseas assets sooner rather than later in order to bring the proceeds back to Chinese soil, Bloomberg News reported Monday.

Although meant as a show of government strength, if anything the move casts doubt on the solidity of China's financial system.

Before authorities weighed in and clamped down on overseas acquisitions, they had for years encouraged companies like Anbang to "go out." Mainland banks helped fund the buying spree, which reached $13 billion in the case of Anbang.

Running Away
China's lost a trillion dollars in foreign exchange reserves as it tries to fight capital flight
Source: Bloomberg

Then, as China tried to stem capital outflows last year, officials had a change of heart. Deals could only be done in a business's core area, and approval was needed to transfer funds abroad. Earlier this year, Anbang was forbidden from selling new universal life products, the risky policies that helped finance its buying binge. Then its chairman was taken into official custody.

At a Premium
China Life sold 281 billion yuan ($41 billion) of insurance policies, including universal life products, in the first quarter. Anbang wasn't far behind, at 189 billion yuan
Source: Bloomberg Intelligence

Cracking down on leveraged buyers like Anbang that use high-risk insurance policies and friendly banks to fund overseas acquisitions is a good thing. This is, after all, an company that until very recently was known as merely a provincial firm selling automobile policies.

But the message a forced sale sends to businesses and other global asset sellers is a different matter. Once the go-to-buyer for all assets globally, China was already turning into the acquirer that couldn't be trusted to get the deal done. Now it looks like it's the door you shouldn't bother knocking on in the first place.

Meanwhile, the more troubling story is that China's foreign exchange reserves have sunk for three consecutive years, declining by more than $1 trillion as its efforts to keep capital from fleeing fell short. 

Forcing Anbang, a private firm, to unload stuff it already owns at what could amount to fire sale prices seems an admission not only that previous attempts at controlling capital outflows haven't worked, but that China needs all the help it can get to keep its financial system afloat. 

--With assistance from Shuli Ren. 

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

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net