Update: China Seizes Multibillion-Dollar Firms Controlled by Fallen Tycoon

The Chinese government seized nine financial companies formerly controlled by fallen tycoon Xiao Jianhua for alleged lawbreaking in an unusually aggressive move to attack risks from his once free-wheeling financial empire.

The China Banking and Insurance Regulatory Commission (CBIRC) took over (link in Chinese) four insurance companies and two trust firms, and the China Securities Regulatory Commission (CSRC) seized (link in Chinese) two securities companies and one futures firm, according to official statements Friday.

All were previously controlled by billionaire Xiao, who was placed under graft investigation by Chinese authorities in January 2017. Chinese authorities haven’t disclosed the specifics of the investigation.

The moves aim to protect investors’ legitimate interests, both regulators said. The takeovers, which took place Friday, will last at least a year, during which the companies will continue to operate normally, according to the watchdogs.

The massive seizure involves assets amounting to nearly 1 trillion yuan ($142.8 billion), according to Caixin calculations based on financial reports. It marks a major step for regulators to dismantle a sprawling business empire built by Xiao under the umbrella of Tomorrow Holding Co. Ltd., one of the highest-profile targets of China’s crackdown on financial risks.

Founded in 1999, Tomorrow Holding grew into a conglomerate with businesses as diverse as banking, securities, insurance, coal and real estate. Through complicated and sometimes illegal shareholding arrangements, Tomorrow Holding controlled a large number of financial institutions that helped fund Xiao’s debt-driven business expansion.

The nine companies formed a key part of the Tomorrow Holding financial business that backed many of its high-profile acquisitions in recent years, which often involved complicated transactions and the use of shell companies.

Many of the financial institutions had funds embezzled by Tomorrow Holding, which ended up failing to repay the money, causing high risks for the institutions and their clients, sources close to the regulators told Caixin.

Last year, the top banking regulator took over Inner Mongolia-based Baoshang Bank Co. Ltd., a debt-ridden lender controlled by Xiao. The good assets of the lender were later taken over by Mengshang Bank, with major shareholders including a national deposit insurance fund managed by the central bank, the government of the Inner Mongolia autonomous region and Anhui-based Huishang Bank Corp. Ltd.

Several other regional lenders previously controlled by Tomorrow Holding, including Bank of Taian Co. Ltd., Bank of Weifang Co. Ltd. and Harbin Bank Co. Ltd., have also launched government-led restructuring to cut ties with the troubled conglomerate.

The government’s efforts to break down Xiao’s financial empire echoed the crackdown on Anbang Insurance Group Co. Ltd., another free-wheeling conglomerate controlled by now-imprisoned businessman Wu Xiaohui. Anbang was restructured into Dajia Insurance Group Co. Ltd. after a two-year period of state custody and massive asset spinoffs.

Dismantling empire

Huaxia Life Insurance Co. Ltd., Tianan Property Insurance Co. Ltd. of China, Tianan Life Insurance Co. Ltd. of China, E An Property & Casualty Insurance Co. Ltd., New Times Trust Co. Ltd. and New China Trust Co. Ltd. were placed under state custody to “protect the rights of policy holders and customers and to serve the public’s interest,” the CBIRC said in its statement.

The four insurers had combined assets exceeding 800 billion yuan by the end of 2019 but suffered different degrees of business and debt problems. The largest one, Huaxia Life, reported a profit drop of more than 77% in 2019, and Tianan Life booked a net loss of 2.5 billion yuan. The two trust firms managed a total of 467.7 billion yuan of assets at the end of 2019.

The regulator assigned six institutions to supervise each of the seized companies’ daily operations, including China Life Healthcare Investment Co. Ltd., China Pacific Property Insurance Co. Ltd., New China Life Insurance Co. Ltd., PICC Property and Casualty Co. Ltd., Citic Trust Co. Ltd. and Bank of Communications International Trust Co. Ltd.

The takeover won’t change the companies’ debt obligations or creditor rights, and business operations will continue as normal, the regulator said.

On the same day, the CSRC assumed control of Guosheng Securities Co. Ltd., New Times Securities Co. Ltd. and Guosheng Futures Co. Ltd., citing their failure to accurately disclose ownership and flaws in corporate governance.

CSC Financial Co. Ltd., Avic Securities Co. Ltd., China Merchants Securities Co. Ltd. and Guotai Junan Futures Co. Ltd. were appointed to manage the companies’ daily operations. The takeover will not affect the company’s businesses and trading, the CSRC said.

New Times Securities had 22.1 billion yuan of assets as of the end of May. Guosheng Securities had assets of 30.8 billion yuan, and Guosheng Futures, 746 million yuan, the CSRC said.

In 2018, China’s central bank identified Tomorrow Holding as one of several “financial holding companies” that needed to be scrutinized in their ownership structure, connected-party transactions and sources of funding as part of a sweeping clampdown on financial risks.

The story has been updated to correct that the seizures involved assets worth nearly 1 trillion yuan.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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