In Depth: How ‘Paper Wealth’ Masks Risks for Chinese Insurers

[para. 1] In early 2025, Dajia Insurance Group Co. Ltd., a state-owned Chinese insurer, acquired a significant stake in Industrial Bank Co. Ltd. As Dajia’s holding crossed the 3% threshold and they secured a board seat, they reclassified their investment as a long-term equity investment, a move enabled by Chinese accounting conventions. This reclassification unlocked a technical one-time gain of approximately 10 billion yuan ($1.4 billion), effectively boosting Dajia’s balance sheet through the equity method of accounting—a method that can generate substantial “paper wealth,” particularly when bank stocks in China trade well below their book value.

[para. 2][para. 3][para. 4] The long-term equity investment classification was intended to insulate insurers from share price volatility, aligning with their preference for predictable, steady returns. However, the flexibility has led companies to use this rule to enhance their reported finances through “negative goodwill.” This process involves three main steps: purchasing a significant interest in a bank trading at a price-to-book (P/B) ratio below 1, gaining board representation to claim “significant influence,” and then recognizing the difference between purchase cost and the proportionate share of net assets as a gain. For instance, Dajia bought shares at a 0.54 P/B ratio, recording a 10-billion-yuan gain when their stake’s book value far exceeded the purchase price.

[para. 5][para. 6][para. 7][para. 9][para. 10] However, the true cash returns are often modest because most Chinese bank stocks persistently trade below book value and have low dividend payout ratios. While accounting values can be inflated, actual share price gains seldom close the gap, which can eventually cause a misalignment between reported wealth and real, realizable profits. Strong insurers with plenty of capital can absorb such paper risks for a while, but for weaker firms, these “latent losses” may become significant liabilities if market conditions do not improve. The strategy is notable for its short-term boost to stated profits and net worth but can leave behind a lingering risk on the balance sheet—at times ballooning into tens of billions of yuan in losses.

[para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18] Examples abound in the industry. Happy Life Insurance raised its stake in Bank of Nanjing, booked negative goodwill to transform planned losses into a small profit, but faced regulatory scrutiny and had to restate results, recording a 1.2-billion-yuan loss when share prices fell. It subsequently regained a board seat and reverted to the equity method, again reversing its reported losses thanks to non-operating gains from the same accounting mechanism. Sinatay Life Insurance applied similar techniques on an even larger scale with stakes in the Bank of Beijing and Zheshang Bank, reporting book values vastly exceeding purchase costs due to depressed market P/B ratios and securing board representation to justify the equity accounting classification.

[para. 19][para. 20][para. 21][para. 22][para. 23] The practice is now widespread, with many smaller banks willing to grant board seats to insurers investing 3% or more of their shares, as banks themselves seek new capital. Yet, the broader risks extend beyond immediate gains. When bank stocks underperform, low dividends and expanding book values combine with inadequate impairment provisions, contributing to what industry insiders liken to “tumors” on insurers’ balance sheets. Over time, three major issues arise: returns are diluted, regulatory exposure caps become a constraint, and impairment risks increase as book values persistently exceed market values.

[para. 24][para. 25][para. 26][para. 27][para. 28][para. 29] The cautionary tale of Dajia and its predecessor, Anbang Insurance, illustrates the danger. Anbang’s massive holding in China Minsheng Banking Corp. ballooned to a book value of 100 billion yuan but led to more than 60 billion yuan in paper losses. By 2023, Dajia had to write down 10 billion yuan in impairments from that stake. For well-capitalized insurers, the strategy may serve as an aggressive “borrowing from the future,” but for weaker or already stressed companies, it amounts to a risky gamble that can deepen financial woes if market realities fail to catch up with optimistic accounting assumptions.