Investors watch price movements on screens in Beijing Feb. 22. China's insurance regulator said risky stock market bets by domestic insurers undermines market stability. (Greg Baker / AFP / Getty Images)Investors watch price movements on screens in Beijing Feb. 22. China's insurance regulator said risky stock market bets by domestic insurers undermines market stability. (Greg Baker / AFP / Getty Images)

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Beijing has cracked down on domestic insurers, suppressing the industry over what regulators have recently deemed speculative investments. The move hurt insurance stocks, driving down the Shanghai Composite Index 3 percent in the week ended Dec. 15.

It’s a move that further cements China’s “Wild West” business reputation: the landscape is mostly lawless, but you never know who will ride into town to spoil the party.

Chen Wenhui, vice-chairman of the China Insurance Regulatory Commission (CIRC) announced stricter regulations over the industry on Dec. 13, including lowering the ratios of equity to be held, and barring insurance companies from using insurance deposits to fund equity purchases.

Chen denounced the insurance companies for making speculative stock market bets and disrupting market stability, according to an editorial in the Communist Party mouthpiece People’s Daily. en adición, CIRC launched investigations into two privately-held insurance giants—Evergrande Life Insurance and Foresea Life, a unit of insurance giant Baoneng.

Beijing has been closely monitoring insurance companies’ activities for months. Their highly leveraged asset purchases are risky and if stock prices fall, their fortunes could quickly unravel.

But the timing and nature of the crack down is intriguing. Para uno, Beijing has been attempting to restrict the outflow of cash, and insurance companies have been a major agent of foreign asset acquisitions in the last twelve months. Al mismo tiempo, CIRC’s investigation into two specific insurers may be driven by an entirely different motive.

Stemming the Outflow

Chinese insurance companies are flush with cash from selling so-called “universal life” products, a high-yielding hybrid product combining death benefit and investments. Foresea’s “universal life” products, por ejemplo, promise returns of between 4 a 8 por ciento. To fund the high returns, insurance companies have been leveraging up to purchase assets both within China and abroad.

Como industria, insurance has been a major driver of foreign acquisitions. Anbang Life is at the forefront of such purchases. Anbang made headlines last year for purchasing New York’s Waldorf-Astoria hotel for nearly $2 millones. A principios de este año, it bought Strategic Hotels & Centros de Blackstone Group para $6.5 millones, and most recently, Anbang has been in negotiations to purchase around $2.3 billion of Japanese residential real estate assets, also from Blackstone. Anbang’s biggest gambit this year was its failed $14 mil millones de oferta para adquirir Starwood Hoteles & Resorts Worldwide.

The timing and nature of the crack down is intriguing.

Fosun is another conglomerate which funds asset purchases from insurance subsidiaries. Fosun has a diversified portfolio of foreign assets, incluyendo los activos externos conocidos como operador de centro de vacaciones Club Med, grupo de performance de circo Circo del Sol, fabricante de accesorios Folli Follie, marca de moda de las mujeres St. John, y el centro de Manhattan rascacielos Una Chase Manhattan Plaza.

Cash leaving the country has accelerated yuan’s devaluation. But perhaps of greater concern for Chinese authorities is liquidity and cash leaving the nation’s banking system. China’s banks already face high delinquency rates and receive regular liquidity injections from the central bank. While official non-performing loan ratios at major banks are low (alrededor 2 por ciento), true delinquency rates—which affect banks’ cash and liquidity—are estimated at between 20 a 30 por ciento.

Restricting insurance companies’ ability to generate cash—which could be used to fund foreign acquisitions—therefore indirectly limits cash withdrawals and preserves liquidity at Chinese banks.

Beijing Intervenes in Vanke

Outside of general restrictions on insurers’ activities, CIRC’s crackdown on Evergrande and Foresea are the most severe.

Regulators barred Foresea from issuing “universal life” policies which made up almost 90 percent of the firm’s premiums. Foresea has used such premiums in recent months to increase its ownership in a number of high-profile Chinese companies.

CIRC also banned Evergrande Life, the insurance unit of major property developer China Evergrande Group, from investing in equity securities. In an announcement on its website, CIRC said Evergrande’s “asset allocation plan is not clear, and its capital funding operations are not standardized.”

Beijing’s decision to intervene in Foresea and Evergrande is interesting, given that the two insurance giants are both major shareholders of China Vanke, a major residential real estate developer. Evergrande and Baoneng both own major stakes in other Chinese companies, but Vanke is the most public and well-known.

Baoneng—through Foresea and several other subsidiary insurers—is Vanke’s biggest shareholder and has been locked in a protracted dispute to wrest control of the company from Vanke founder and CEO Wang Shi, one of China’s best-known and earliest entrepreneurs.

Last week, CIRC criticized the entire domestic insurance industry, calling its recent investments into other Chinese companies “barbaric.” The tone and characterization is similar to Wang Shi’s portrayal earlier this year of Baoneng as “barbarian,”Una referencia al libro‘Barbarians at the Gate’acerca de la 1988 adquisición hostil de RJR Nabisco por el gigante de capital privado Kohlberg Kravis Roberts & Co.

Evergrande is another top shareholder in Vanke and has been building up its shares quickly over the last few months. Its intentions so far are unclear, but Evergrande’s parent is poised to overtake Vanke as China’s biggest residential developer in 2016.

Both companies could demand board seats at Vanke’s shareholder meetings in March 2017, which could determine the fate of Wang Shi.

And here’s where Beijing steps in as Wang’s white knight. Wang is a celebrity with a rock star-like reputation, y uno de los empresarios de primera generación de China, que es sinónimo de la subida de Shenzhen como un centro de negocios. Since founding the company in 1984, Wang cuidadosamente manejado su relación con los órganos del partido comunistas locales y regionales. Vanke siguió en gran medida planos del partido para desarrollar y construir casas y apartamentos en toda China durante el boom inmobiliario, and is said to have a wealth of Communist Party connections.

Para los observadores occidentales, the Vanke takeover battle seems routine. inversores activistas como Carl Icahn y Daniel Loeb que agitan los consejos de administración es un lugar común en los Estados Unidos. Pero el enfrentamiento sobre Vanke es una rareza en los mercados de China, donde el Partido Comunista en el poder ansía estabilidad y control, sobre todo,.

En años recientes, regulators have increased rhetoric about letting free-market forces play a more decisive role in shaping the country’s financial markets. Analysts had been wondering how the Chinese regime would handle a possible downfall of one of China’s most successful businessman, which will reveal much about its market intentions.

It looks like we have our answer—CIRC’s crackdown on Vanke’s top shareholders will likely stop Baoneng and Evergrande’s further advance.

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