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The rapid rise and fall of the Anbang empire

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RARELY in corporate history has a giant come and gone so quickly. Anbang was founded in 2004 as a small Chinese car-insurance company. By the start of last year it ranked among the world’s biggest insurers with some $300bn of assets, including stakes in hotels and financial firms across America, Europe and Asia. Given another ten years, boasted Wu Xiaohui, its swashbuckling founder, Anbang’s scale would “exceed your imagination”. But then, just as vertiginous as its ascent, came its fall. Alarmed at its debt-fuelled expansion, regulators started blocking its overseas deals, reined in its insurance business and detained Mr Wu. On February 23rd its disgrace became complete: the Chinese government announced that it had taken over Anbang and would prosecute Mr Wu for economic crimes.

The insurance regulator said it had intervened because illegal operations could have “seriously endangered” the company’s solvency. It did not spell out the exact nature of Anbang’s alleged offences, but it has been clear for at least a year that the two core features of its business model would no longer be tolerated. The first was its method of raising cash. Anbang sold high-yielding, short-term investment products in the guise of insurance, turning what should have been the safest corner of the financial system, the insurance sector, into one of its most dangerous.

The second was what it did with that cash. It was an aggressive, some say foolhardy, investor overseas. It paid $2bn for New York’s Waldorf Astoria hotel and $6.5bn for hotels owned by Blackstone Group, the world’s largest private-equity firm. When Xi Jinping, China’s president, last year called for a crackdown on “financial crocodiles”—companies seen to be destabilising the economy with excessive borrowing and reckless investments—Anbang’s misery deepened. Other high-flyers, notably HNA and Wanda, two of China’s biggest private conglomerates, have also faced close scrutiny and are selling off assets to repay their debts. But none has come under as much pressure as Anbang.

One reason that Anbang has been treated so harshly may be that it has fewer defenders in high places. State-owned banks are some of the main creditors to HNA and Wanda, whereas Anbang has relied more on premiums from its insurance sales. But that raises a question: why did regulators allow Anbang to get so big in the first place? For a time, Mr Wu appears to have had powerful backers. He was married to the grand-daughter of Deng Xiaoping, China’s revered former leader. He also was reputed to have a close relationship with Xiang Junbo, the top insurance regulator during Anbang’s dizzying rise. Yet nothing is permanent, not least in Chinese elite politics. In 2015 Caixin, a respected Chinese financial magazine, reported that Deng’s grand-daughter had separated from Mr Wu. And early last year Mr Xiang was detained for corruption.

When Anbang’s reputation in Beijing started to fray, it looked to cultivate connections in another capital: Washington, DC. It entered talks with a company owned by the family of Jared Kushner, Donald Trump’s son-in-law, to invest $400m in a New York skyscraper. It looked as though Mr Wu was trying to prove his worth to Chinese officials by having a direct line, or just about, to Mr Trump. But this last bid at saving his career, if that is what it was, came up short. A flurry of media reports examining the deal and the potential conflict of interest led the two sides to break off talks.

Mr Wu was once lionised in Chinese media as a master of the “Warren Buffett model”, drawing income from insurance premiums to assemble a strong, diversified investment portfolio. This was always far-fetched, with Mr Wu far more reliant on debt and far less disciplined in his deal-making. But one crucial question in the months to come will be whether, despite all the evidence of rashness, he actually managed to spend some of Anbang’s cash shrewdly. This will help determine how successful the Chinese government is in unwinding its excesses without causing widespread collateral damage.

The regulators’ stated goal is to manage Anbang for one year, stabilising its operations and attracting new investors in order to return it to private hands. The real goal, according to two executives with other insurers, is to pay off policy-holders and honour its debts by finding buyers for its assets. Although it might have overpaid on many of its international forays, it bought into domestic banks and property developers when they were priced more cheaply. Its stakes in Minsheng Bank and Merchants Bank, two of the country’s top commercial lenders, will be sought after by other insurers. Regulators could sweeten the deal further by letting them issue special bonds to finance these acquisitions.

If the process is handled well, Anbang could be all but wound up by next February. It would return to where it began barely a decade ago, a small player on the periphery of China’s financial system, not the colossus at its heart of which Mr Wu dreamed.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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