The Wu Xiaohui who appeared in a Shanghai court in late March on fraud and embezzlement charges was a far cry from the man who rapidly turned a modest provincial car insurance business into an investment conglomerate with Rmb2tn ($316bn) in assets.
Tie-less and wearing a rumpled suit, the founder of Anbang “expressed deep self-reflection, understanding of and regret for the crimes and expressed deep remorse”, according to a post on the court’s social media account. But to no avail. On Thursday, he was sentenced to 18 years in prison.
The contrast could not have been more striking with the confident magnate who received visitors into the night in the Royal Suite of New York’s Waldorf Astoria hotel, which Anbang owned. Wearing bespoke suits and European designer ties, he would peel off gifts from a gilt tray to present to petitioners and then jet away in his private plane to give a speech at Harvard or inspect a potential acquisition in Europe.
At the time of his detention in February, Anbang controlled 58 companies directly or indirectly. As well as New York hotels, its holdings included rescue financings of troubled European financial institutions, control of a South Korean insurer and substantial equity stakes in about 20 major listed companies in China. Wu, who married into the family of Deng Xiaoping, the country’s former leader, also boasted political contacts outside China including Jared Kushner, Donald Trump’s son-in-law, who he met shortly after the 2016 US presidential election.
When police arrived at his head office in Beijing almost a year ago to detain him, Wu initially tried to resist arrest, according to a senior employee of the group. That act of defiance belied the fact that the writing was already on the wall for the owner of a group that had grown so fast in such a short period of time. For months regulators had referred to Wu as a criminal in meetings and conference calls with Anbang staff. But more importantly, Wu had also incurred the enmity of the Communist party of China itself.
Amid the anti-graft campaign that President Xi Jinping has conducted over the past five years, it is Wu who has become the face of corruption. While other high-profile companies have been discouraged from doing overseas deals, such as Dalian Wanda and HNA, none has received the punishment now facing Wu.
Regulators seized control of the Anbang group in February and many of the businesses that he acquired now stand in disarray.
At a time when the ruling Communist party is re-inserting itself into more areas of the Chinese economy, the downfall of Wu is the most striking tale of a private company that grew too big and challenged powerful vested interests. The public humiliation of Wu is a cautionary tale, an illustration of the party’s determination to impose its will, especially on companies it fears might threaten the stability of the financial system with aggressive risk-taking.
“When you had freewheeling growth like you did under [former leader] Hu Jintao, then the atmosphere was commercially relaxed and non-state and state companies just grew, handed out goodies to their patronage network and never worried much about non-compliance and cutting corners,” says Kerry Brown, the director of the Lau China Institute at King’s College in London and a former British diplomat.
“The Xi era is tighter — tighter in terms of lower growth, tighter politics . . . and there is simply less space for these companies to do as they please. They are under a much tighter political leash now. They serve and obey or they get punished.”
At the time when Wu was assembling his business empire, he could consider himself one of the most politically connected businesspeople in China. His third marriage was to the granddaughter of Deng Xiaoping and he also had the backing of another prominent princeling, Chen Xiaolu — the son of Marshal Chen Yi, a Communist hero in the civil war — who was an early member of the Anbang board.
“Bad people did bad things precisely because of their perceived backing,” says the head of one investment firm and prominent party member.
However, that protection gradually disappeared. The Deng family had long distanced itself from Wu, considering him unfaithful to his wife, according to bankers and officials with close ties to the Dengs. Chen Xiaolu died the same week as the charges against Wu were announced.
He also had powerful enemies, including Wang Qishan, the powerful anti-corruption head and close associate of Mr Xi, who was recently appointed vice-president. The news that regulators were looking into Anbang was first reported in 2016 in Caixin, a Beijing-based magazine whose founder Hu Shuli is considered to be close to Mr Wang. At that time, Wu told the Financial Times that Ms Hu’s “biggest backer is my biggest enemy”.
The charges that Wu was convicted of relate to the way the finances of the group were managed, including the shifting of billions of dollars of funds between different entities that he allegedly oversaw. His sister, who was officially head of Anbang Hong Kong, has also been detained.
Prosecutors accused Wu of using “false material” in 2011 to get regulatory approval to sell insurance products. They also said that he had oversold Rmb724bn of insurance products and had diverted Rmb65bn to another company he controlled, which he had partly used for “lavish personal spending”.
In addition, Wu was accused of using the proceeds from insurance sales to inject capital back into Anbang in order to give the impression that the company was more financially stable than it was.
Analysts say Anbang was bound to attract the attention of Chinese regulators because of the nature of its business model. The group relied on issuing wealth management products for its funding. These risky investments were sold to ordinary people seeking higher returns than they could get from bank deposits. Given the nature of the investors, the Chinese authorities worried that any failure to pay out on the products could lead to social friction.
At the same time, the group took huge risks on how it invested the funds. Two months before Wu was detained, the company had 19 per cent of its long-term investments in stocks, presenting a high level of risk should the market be hit by a downturn. Most insurance companies in China have less than 5 per cent of their assets invested in the stock market. Another 19 per cent was invested in redeemable short-term loans provided through trusts, an opaque area of shadow banking in China in which risk is almost impossible to assess with available public information.
“Not only is this a systemic risk but it’s a significant one,” says Sam Radwan, co-founder of Enhance International, a consultant to China’s big insurers. “[Anbang] is comparable in size to Ping An and China Life but they grew to this size in just a few years. This has the potential to be a tsunami if it’s not handled well.”
For Anbang’s insurance business, a short-term solution has been devised: it will receive a Rmb61bn capital injection from an insurance-industry rescue fund until the company can find new long-term investors — including, possibly, foreign investors.
However, much of the rest of the empire remains a mess. Regulators implicitly acknowledge that they have yet to come up with a neat resolution for the assets it controls.
“During the takeover, the working group will actively introduce high-quality social capital to Anbang, restructure its shareholding and will keep Anbang as a private company,” according to a February 23 announcement by the insurance regulator.
According to one person with direct knowledge of the situation at Fidea, an Anbang-controlled Belgian insurer, there is little leadership, management or communication with the local staff — a statement that could apply to many other Anbang holdings as well.
The deal that catapulted Wu to international fame, the 2014 purchase of the Waldorf Astoria hotel in New York for $1.95bn — and a 100-year management contract to Hilton, its former owner — is in trouble.
He loved to boast about the hotel. “If you become an employee of Anbang, you will be entitled to a free dinner and a free room night when you get married,” Wu said in a 2015 speech at a Harvard recruitment event. “If a male Anbang employee plans to check into the Waldorf in the future, I might even assign him the room once occupied by Angelina Jolie.”
Wu embarked last year on an expensive renovation of the Park Avenue landmark, planning to transform the bulk of the property into luxury condominiums to be marketed to wealthy compatriots. But having spent only $200m-$300m on the initial stages of the project, the company has to come up with up to $1.5bn more to complete the redesign — money that it does not have, according to Anbang staff. Meanwhile prices of luxury condominiums in New York have dropped about 20 per cent, according to real estate investors.
Similarly, Strategic Hotels & Resorts, which Anbang bought from Blackstone for $6.5bn in 2016 — just months after the US private equity group had bought the chain for about $6bn — is also in disarray. On March 20, David Hogin, the chief operating officer of the hotel group, wrote a letter, seen by the FT, to Anbang’s New York staff pleading that they approve the hotel company’s budget and compensation, for fear that staff would leave.
“We understand that given the unusual recent developments within Anbang, it has been difficult to obtain approval,” Mr Hogin added, noting that the company would record a loss of about $27m for the year.
Over time, insiders worry that the health of the rest of Anbang’s assets will continue to deteriorate. Employees say that there is a dearth of good managers able to fill Wu’s place because he trusted only a handful of his employees beyond his family, preferring to surround himself with “unimpressive people who would just follow his orders and not question them,” according to one employee. “He did not trust anyone.”
Private equity firms including Apollo, Blackstone, Cerberus, JC Flowers and KKR are poring over Anbang’s assets, especially its holdings of offshore banks, insurers and properties to see if any can be bought at bargain prices.
“When I joined this company, I was told the chairman is the type of person who burns the bridge after crossing the river,” says a senior Anbang executive. “That is wrong. He actually burnt the bridge before he even finished crossing it. It is a shame for all Chinese.”
Scattergun empire: Anbang’s overseas assets face uncertain future
The fate of the financial institutions Anbang controls in Belgium, Portugal and South Korea remains uncertain. When the investments were initially announced, European regulators thought of Chinese buyers as their saviours.
“They believed you couldn’t say no to China,” says a former senior executive in the industry. “That proved a big mistake. Today these companies are rudderless.”
Anbang signed deals to buy the 270-year-old Banque Nagelmackers in Brussels and Fidea in Antwerp over a span of just three months in 2015. When Anbang bought Fidea, Wu paid 40 per cent more than the second most generous bidder, says one person involved in the sale.
The situation is similar in South Korea, where Anbang controls two insurance companies, Tongyang and the South Korean operations of Allianz, making Anbang one of the five top insurers in that country. Tongyang also has about 4 per cent of Woori Bank, one of the country’s most important lenders.
The authorities are still debating what to do about Wu’s personal stake in Anbang, according to a regulatory official and several investors — although no one knows exactly how big that stake is or how much it is worth.
Indeed, many Anbang executives doubt the shares have any value. “All the cash flow came from selling wealth management products,” says one Anbang executive. “If the issuance of these products came to a stop, the company would be dead.”
Meanwhile even as the Chinese authorities ponder what to do about the assets Anbang controls, they have already moved to take over other assets belonging to Wu. These include a mansion in Port Chester Long Island, near New York, that still has mortgage payments due to East West Bank.
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