China’s massive international real estate buying spree just got another hurdle. Anbang Insurance Group, the Chinese behemoth that’s been buying landmarks across the globe, has lost its Chairman to an anti-graft campaign. While he’s not being accused of criminal activity, an investigation being led by the Communist government’s corruption watchdog will put a temporary halt on their real estate buying. This was likely a warning to other companies to consider lowering their leverage, and quit sending capital out of the country.
WTF Is An Anbang?
No, it’s not that thing you did that time in college. Anbang is a private Chinese insurance company based in Beijing. It was started 12 years ago with significant equity injections from major state owned enterprises. The complete ownership is more than a little murky, although US Congress just flat-out calls them a “state-owned foreign financial entity.” They employ over 30,000 people, and hold more than US$ 289 billion in assets. To give that number some context, Alphabet (the company formerly known as Google) had US$ 172.76 billion in assets as of March 2017. So, Anbang is kind of a big deal.
Anbang is officially an insurance company, but not even close to a traditional one. They sell high yield investments, and use the cash to make high profile acquisitions tied to inflation sensitive assets in foreign countries (mostly real estate). They first got on Western radars when they bought the Waldorf Hotel in New York City for US$ 1.95 billion, which they’re going to turn into condos. They also made headlines when they attempted to do business with White House advisor (and President Trump’s son-in-law) Jared Kushner, but the deal supposedly fell through because it would be a liability for the Trump administration. This was right around when s**t starts going cray-cray.
Possibly China’s Largest Property Buyer
Over the past two years Chinese real estate investment surged, with Anbang behind a lot of the deals. It’s estimated that Chinese investors made US$ 54.7 billion in investments from 2015 – 2016. Anbang’s investments total US$ 16 billion during that time. This means almost a third of all Chinese global real estate investment could have come from this one firm.
Chairman Wu Gets Detained
Anbang’s rapid expansion was largely due to their ambitious Chairman Wu Xiaohui. On April 28, rumors began floating on Chinese social media that he had been detained for “illegal loans” he used to “transfer assets overseas.” Two days later, Chinese financial news site Caixin poured through registries, attempting to demystify shareholder structure. While doing so, they determined that there may be cross investments pledged by subsidiaries. They questioned whether these cross investments led to capital reserves being counted more than once. Shortly after Chairman Wu made an appearance to deny the allegations, but that apparently never made it to Mainland Chinese press.
On June 2, Financial Times (FT) reported that Chairman Wu was barred from leaving China. A financial executive told FT, the government “wants to stop financial institutions from doing crazy things” that might provoke a financial crisis. On June 15, Bloomberg reported he isn’t accused of criminal activity, but is being questioned on “economic crimes.” That same day Anbang sent out a press release saying Chairman Wu will “temporarily [be] unable to fulfil his role for personal reasons.” Maybe he took some time off to have a movie marathon featuring Will Ferrell’s Get Hard? You know… because there’s some great life lessons in that movie.
Future Of Chinese Real Estate Buyers
If Chairman Wu is on the sidelines, does this mean Anbang’s shopping spree will come to an abrupt end? In my opinion, this was a warning shot to Chinese companies to lower leverage, and more important – stop capital outflows. China has laid down aggressive rules to further crackdown on capital from leaving the country. The government has been blocking deals of all kinds – from TV studios, to regular people looking to acquire personal real estate. It would be surprising for a firm even close to the size of Anbang to continue their buying spree. Chinese buyers will be back, but not until the yuan goes convertible. Don’t expect that to happen anytime soon, since China is refusing the ability for yuan to USD convertibility.
Global real estate markets that have exhausted domestic capital growth and were depending on foreign capital are probably going to have to look elsewhere. Maybe Russia? Or you know…quit chasing artificial growth.