Anbang was seized by China. Now, it has a deal for you

[BEIJING] Less than a month after it was seized by the Chinese government, Anbang Insurance Group, the giant conglomerate, is once again offering small investors "you snooze, you lose" investment opportunities - your money back, guaranteed.

Sold like stocks or bonds in bank branches around China, the products carry names like Anbang Abundant Stability No 10, suggesting the investments are conservative. They are anything but.

In the past, Anbang has used the money it raised from those products to help pay for risky deals like the purchase of the Waldorf Astoria hotel in New York and other flashy properties around the world. The approach saddled the company with big debts at a time when authorities were trying to stamp out financial troubles.

Still, Anbang and other companies keep selling them - and Chinese investors keep buying them. When China took over Anbang, it only underlined the widely held - and potentially dangerous - belief that the Chinese government will always be there to bail them out.

"The government wants to maintain stability," said Nancy Cheng, a 35-year-old employee in a financial firm who has invested thousands of dollars with Anbang and another insurer. News of the government's Anbang seizure, she said, did not shake her confidence.

The government "would think of solutions", Ms Cheng said. "Since they allowed this indulgence, they should be there to clean up the mess."

China has a problem with debt. Shadowy, underground lenders have flooded the country with a staggering US$15 trillion in credit, which threatens to hobble its economy.

Beijing now appears to be taking a harder stance with the companies in need of a bail out. On Wednesday, Chinese authorities accused a founder of Anbang, who was the dealmaker who bought the Waldorf Astoria, of bilking investors of more than US$10 billion. In a country where courts tend to convict, the accusations raised the likelihood that the executive, Wu Xiaohui, could face life in prison.

Officials have also spent the past two years trying to contain the risk. Earlier this month, the Chinese government said it would merge the country's banking and insurance regulators in an effort to close regulatory loopholes.

Central to that effort is keeping a tighter rein on products like Anbang's Abundant Stability No 10. Many small investors believe that means the government backs them. Anbang also calls them "universal insurance products", making them sound conservative.

The truth is more complicated.

Abundant Stability No 10 is closer to what in China is called a wealth management product. Wealth management products on paper are not backed by the government, but state-run banks act as middlemen and sell them to small investors, giving many people the perception that they are. The salespeople often know little about what is backing them - or how the people ultimately behind them will pay the money back.

Abundant Stability No 10, for example, requires only a US$4,600 investment over three years. In return, investors are promised a payout that is triple what Chinese savers might get by parking their money in a savings account. On the phone, salespeople at one state-run Chinese bank, China Merchants, said the payout could be even higher, perhaps 10 times what a savings account pays out.

Shen Gang, a company spokesman, said that banks were an important channel for the company's insurance products and that the government takeover had not changed the operations of Anbang at all.

"Anbang has always been very stable on the financial front," he said. "As such, the selling of our products is a normal business activity."

Li Yan, 48, a founder of a technology company, bought a universal insurance product from Taikang Insurance, an Anbang rival. She said she was a "teeny bit" concerned about the government takeover of Anbang but "didn't think it's a huge problem", citing the two insurers' political connections.

"Aren't insurance companies not allowed to go bankrupt?" she said.

Chinese authorities have pressured big issuers to slow down. In November, they said they would set stricter rules on disclosure and stop firms from guaranteeing payments to investors, among other steps.

Data suggest China is making some headway. The total outstanding balance of wealth management products issued by Chinese banks was about US$4.7 trillion in 2017, up just 1.7 per cent from a year before, according to China Wealth, a state-backed company that tracks China's wealth management products. Two years ago, sales were growing at roughly 50 per cent strong.

"I would say that the risk of the debt crisis has come down because of what the government has done," said Wang Tao, head of Asia economics for UBS Investment Bank. "The problem is not entirely resolved but it's moving in the right direction."

Still, the government has a lot of work to do before investors shake the notion that the government amounts to an eternal safety net.

In his last news conference as China's central bank governor, Zhou Xiaochuan, long a proponent of Chinese financial overhauls, said on March 9 that the country had to strengthen investor education. He said investors had to "fully learn" about new financial products before they bought them.

"If you want to use them, you have to take your own risks and find out for yourselves," he said. "You can't leave it entirely to the regulators to manage them."

Zhu Ning, a Tsinghua University economist, said the only way the government can prevent investors from taking on more risk than they can handle is to allow for "some real failures."

China has been reluctant to allow for failures. Fearing mass unrest, the ruling Communist Party has repeatedly instructed Chinese banks and local officials to cave in to angry investors, who have protested outside government offices after losing their investments.

The real test, according to Mr Zhu, could come later this year, when wealth management products issued years earlier have to be paid back.

"Non-performing loans are going to be so severe that some of the weaker banks will be forced to face their Judgment Day - whether they are going to be bailed out or whether they are going to die," he said.

In the last five years or so, retail investors have poured money into wealth management products that enabled China's developers to circumvent laws to buy land, "zombie" state-owned enterprises facing overcapacity problems to borrow, and debt-laden local government financing vehicles to take on more leverage.

In the case of Anbang, it helped the company raise money for trophy acquisitions such as the Waldorf Astoria.

"They were just buying up assets, playing the markets and investing overseas, which, of course, isn't really beneficial to China's economy," said Christopher Aston, an associate consultant in Shanghai at Control Risks, a global risk consultancy, who is writing a book on his experience in a Chinese shadow bank.

The market is still booming for Anbang. According to data from China's insurance regulator, Anbang earned US$9.2 billion in income derived mostly from universal life insurance products in January, compared with just US$1.3 million a year before.

Very few investors in China tend to ask where the money is going. Part of the problem is that many people became cash-rich in a relatively short period of time without an industry of financial advisers that is common in the West.

"The investment mentality really has not evolved," said Lester Ross, chair of the insurance forum of the American Chamber of Commerce in China. "It's rather recent."

Meng Hongxia, a hotel employee who says she earns US$480 a month, was considering such a product while inside a branch of China Merchants. She said she was mulling putting her entire savings of nearly US$8,000 in a wealth management product because it promised a yield of more than 4 per cent and guaranteed repayment.

"What do you think?" she said, when asked about the product. "Should I invest?"

NYTIMES