Baoneng's Highly Leveraged Move on Vanke Raises Risk Concerns
(Beijing) — Baoneng Group's highly leveraged move on China Vanke Co. Ltd. has raised concerns about liquidity risks and the existence of loopholes in China's financial system.
Chinese insurer Baoneng became the top shareholder in the giant residential property developer with a 25% equity stake it bought for more than 40 billion yuan ($5.8 billion), which it raised through the sale of policies and other investment products.
While the fundraising method Baoneng used did not violate any regulations, it did reveal loopholes in the current legal framework, according to Wu Xiaoling, the vice chairwoman of the Financial and Economic Affairs Committee of the National People's Congress, China's legislature.
"We can see that such a capital-raising structure contains many risks, which requires our regulators to close loopholes," Wu said Saturday during a financial forum jointly held by China Wealth Management 50 Forum and the National Institute of Financial Research of Tsinghua University.
Wu pointed out that one of the major risks in Baoneng's acquisition was the use of short-term, high-yield universal insurance policies to make long-term equity investments.
"When public funds invest in insurers, they should be responsible to the public, not act as a fundraising platform for a few big shareholders," she said at the forum.
Another controversial aspect of Baoneng's funding was its use of complex structured asset management plans (AMPs) backed by cash raised from wealth management products, offered by banks that are already burdened with mounting bad loans.
Baoneng's aggressive use of AMPs without clear disclosure was likely to trigger further hazards across financial markets due to the increasing interconnectedness of China's banks, insurance companies and securities firms, Wu said. The practice also could put more pressure on risk control mechanisms of AMPs, as well as pose more challenges to regulators, she said.
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