Giant Chinese insurance ponzi hits the skids

Via Investing in Chinese Stocks.

A leaked document circulating on the Chinese Internet shows one of China’s most aggressive sellers of universal life insurance is in trouble. Foresea Life was selling policies like hotcakes in order to fund parent Baoneng’s takeover attempt of Vanke. The chairman of Baoneng was banned from the insurance industry for 10 years, and now the insurance division might be facing a Ponzi-collapse if it cannot sell enough new policies to meet the cash demand from a ballooning amount of surrendered policies. Last year, policies surrendered totaled 9 billion, an increase of 5.2 times. This year, the 2017 estimated surrender value (estimated by Foresea) is 60 billion, an increase of 6.7 times.

Some background, from September 2016, Barron’s: China Cracks Down On High-Yield Life Insurance Policies

Hong Kong-listed Chinese insurers soared after the China Insurance Regulatory Commission put the brakes on high-return life insurance policies, essentially short-term wealth management products.

Universal life insurance is one such policy, commonly offering 5-6% annual return. Players like Evergrande Life even offer 8%.

And such policies have been funding unlisted insurers to buy mainland China’s A-shares. Qianhai Life Insurance of Baoneng Group has been issuing these “life insurance” policies to fund its purchase of China Vanke’s (200002.China) shares.

September 2016, SCMP: Unlisted insurers to be hit hard by clampdown on flexible, but ‘risky’, universal life products

Anbang’s premiums from investment products reached 186.9 billion yuan, a 271 per cent year rise on the previous year. Evergrande Life Insurance’s investment premiums swelled 705 per cent to 23 billion yuan while that for Qianhai Life surged 228 per cent to 50.1 billion yuan, according to calculation by SWS Research.

If insurers use cash collected from universal life products to buy shares in listed companies, they have to issue the products continuously to maintain cash levels, because many buyers surrender them within three years, Li from CMS said.

February 2017, FT: China bans fourth-richest man from insurance sector for 10 years

China’s fourth-richest man has been banned from the country’s insurance industry for 10 years, in the most aggressive move yet by regulators to tame borrowing and hostile corporate takeovers by insurers.

Yao Zhenhua, chairman of financial conglomerate Baoneng Group, last year launched a high-profile raid on China Vanke, the country’s largest residential developer. He acquired a stake worth 25 per cent, prompting Vanke’s chairman to label Baoneng “barbarians”.

Much of the funding for Baoneng’s Vanke stake and other investments came from policies sold by its life insurance unit, Foresea Life Insurance, which Mr Yao also chairs.

December 2016, Reuters: China suspends Foresea Life from selling “universal life” insurance

Today, Reuters: China insurer Foresea Life says operations normal, cashflow stable

Local Chinese media and Britain’s Financial Times, citing a letter sent from Foresea Life to China’s insurance regulator, said the insurer may be unable to meet payouts if it was unable to sell new products.

The letter from Foresea Life, dated April 28, requested the China Insurance Regulatory Commission (CIRC) to resume new product approvals to “avoid inciting mass incidents by clients and localise and systemic risks”, the Financial Times said.

Foresea Life had been aggressively wresting market share from bigger, listed peers by offering investors guaranteed-return, higher yielding products.

Today, FT: Chinese insurer warns of defaults as ban on new products bites

One of China’s largest insurers has warned of mass defaults and social unrest unless the regulator lifts a ban on its issuance of new products, the latest sign of stress in the industry caused by a crackdown on financial risk.

In a letter to China’s insurance regulator seen by the Financial Times, Foresea Life Insurance warns that the company expects Rmb60bn ($8.7bn) in redemptions this year and might be unable to meet payouts unless it is able to sell new products.

In December, the China Insurance Regulatory Commission banned Foresea for three months from applying to sell new products. In February, the agency banned Foresea chairman Yao Zhenhua, China’s fourth-richest man, from the industry for 10 years.

In the letter dated April 28, Foresea asks the CIRC to resume new product approvals “in order to avoid inciting mass incidents by clients and localised and systemic risks, producing greater damage to the industry”. The term “mass incidents” is commonly used in China to describe demonstrations, protests and riots.

iFeng: 前海人寿被传陷“600亿退保”危情 回应称经营正常

Recently, screenshots of documents relating to Qianhai cash flow and surrender pressure spread on the Internet, including the “Shenzhen Insurance Regulatory Bureau recommended paying attention to Qianhai cash flow risk”, “on the request to support the normal operation of Qianhai and related matters Of the report” and so on.

The above mentioned documents, Qianhai, said, “In 2017 our company is expected to have 60 billion yuan in surrendered policies,” and asked the CIRC within a certain amount of sales within the scope of the resumption of universal business sales and new product declaration. In addition, the document also pointed out that the Qianhai risk of cash flow, the first quarter of this year, the company’s cash inflows substantially reduced. However, the authenticity of the above documents, the reporter did not from the CIRC and Qianhai to be confirmed.

According to the iFeng article, 78 percent of Foresea’s (Qianhai in pinyin) premiums came from sales of universal life policies back in 2015. It saw 60 billion in investment inflows thanks to those policies. Business has since slowed, although some don’t see a big risk.

After the suspension of the Universal Insurance business, according to the recently released data, the former life insurance in the first quarter of 2017, the original insurance premium income of 13.48 billion yuan, compared with 11.89 billion yuan in 2016 increased, while the new investment To 46.78 million yuan, compared with 33.46 billion yuan last year.

According to the solvency report, at the end of the first quarter of 2017, the net cash flow of Qianhai Life was -12.4 billion yuan, the consolidated current ratio was 198% in one year and the liquidity coverage rate was 257%. At the end of the first quarter of 2016, the net cash flow was 8 billion yuan.

People close to Qianhai said that the 2016 annual report shows that as of the end of the year, Qianhai had cash and cash equivalents balance of 43.66 billion yuan, plus the first quarter of 2017 scale premium income of 13.5 billion yuan, Qianhai to achieve annual cash net inflow is not stressful.

Assuming the document is real, we now know why regulators and the central bank suddenly eased their stance on deleveraging last week. The problem is that, as Mises said so many years ago:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

In the end, the yuan will pay the price.


    • ResearchtimeMEMBER

      Nah, don’t buy the Sell side BS. It means nothing. Show for the populace, still continued for historical reasons, as a pledge to the proletariat… none of those left now. No major decisions are made, no big strategy debated. Its all rubber stamped long before.

      Also, you fall for the superiority trick that a planned economy can control events greater than a deregulated/open banking industry. Flies in the face of logic, and history. If you believe the NY Fed, China has consumed half the worlds debt since 2003!!! Think about that for a brief moment… with 800m people still earning bugger all, have no debt, often have no bank accounts…

      Real chance this China crash could kick off months before then…

      • I think cmb is right. They will keep the zombies alive until the show is over and then bring the whole shebang down. Will see tanks out on the streets as well.

      • Jeremy Bentham

        Also, you fall for the superiority trick that a planned economy can control events greater than a deregulated/open banking industry. Flies in the face of logic, and history.

        What are you blathering on about ? Of coure regulatory control can control an economy better than otherwise -its absurd to think otherwise. Removing regulatory controls gave us the global financial crisis. Derp. But even more perversely the blind faith an unfettered free market, now utterly derided in “thinking circles” leads to absurd allocations of resources and galactic levels of inefficiency. The outsourcing of the United States military is testament to that. A gigantic black hole of money delivering failed projects all fractured into rent seeking silo’d suck holes. Its a disaster – while China responds with three carriers in less than two years.

        If you believe the NY Fed, China has consumed half the worlds debt since 2003!!! Think about that for a brief moment… with 800m people still earning bugger all, have no debt, often have no bank accounts…

        Yeah sure that sounds true. I mean the United States has only gone from $20 Trillion to $60 Trillion combined private public debt in that time. We KNOW how much has been put into US banks and corporations, not to mention UK – the endless bailouts and injections. The US manufacturing and UK just collapsing while China becomes the engine room of the world.

        China now has more middle class people on comparative wages to middle class Europe and middle class United States COMBINED – so, why wouldn’t they be taking more than the rest of the world anyway ?

        There is a tendency for people on this blog to walk past the Yangtze and spy and man drinking a glass water only to declare that the river is not that big after all the hype. You see what you want to see and deny all reality.

      • “China now has more middle class people on comparative wages to middle class Europe and middle class United States COMBINED – so, why wouldn’t they be taking more than the rest of the world anyway ?”

        Evidence please. For the counter argument see here for example

        From memory, Asian Dev Bank defines middle class in Asia as being anyone earning more than $20 a day.

      • Jeremy Bentham

        Thanks Dave – read your own link next time – your AVERAGE Chinese wage according to that article is US$8,655 / annum – this includes half a billion peasants dilluting that number. So your assertions look decidedly shakey from your own source.

        76 percent of China’s urban population will be considered middle class by 2022. That’s defined as urban households that earn US$9,000 – US$34,000 a year. (That might not sound like a lot, but adjusted for prices, it delivers a roughly comparable “middle class” existence to other countries.)

        Now lets not forget that the Chinese have free university education, free health, and free everything else – unlike Americans. And here we are talking about 76% of Urban Chinese. (1.407 Billion at 2020 by 76% is 1.069 Billion)

        But lets not forget, also from your own article …..

        Beijing recently overtook New York as the ‘Billionaire Capital of the World’

        Soooo – thanks for popping by. You’ve been great.

      • Hey H&H

        Just out of interest … do you know why our resident Chinese troll/astroturfer keeps morphing? I see he is now using “Jeremy Bentham” as his moniker but as others have noted he has used at least half a dozen historical names over the last couple of years.

        He is getting very good at his game of providing misinformation, shanghai-ing discussions and trolling. But at the end of the day it is clear to me that he frequents this site to stymie discussion regarding China.

      • Dude, you’re all over the show.

        “But China’s average annual wage was 56,360 yuan ($8,655) in 2014, and Goldman Sachs estimates that 387 million rural workers — half the working population — earn about $2,000 a year”

        So 387mil, a fairly big chunk, earns 2k and the average is 8k. Explained by – the billionaires you cite (and millionaires), bringing up the average.

        I do take your point about prices though. But whichever way you cut it, these are not middle class consumers as the global economy defines that. Remember that when we’re talking about the Chinese middle class, its often in the context of firms that want to sell them products middle class consumers in other countries buy. They don’t have the coin for that. 8k a year does not buy you a lot of Western middle class goods and services.

        But anyways, we all know there is a heap of confusion about this whole issue. Noone seems to have a good handle on it.

  1. Hi Houses

    In this case, if the insurer was merely operating as an unlisted trust invested in usually saleable equities, then life is certainly easier as assets grow, but as assets fall you have to make sure the exiting investors pay their fair share in transaction costs as well as ensuring asset valuations align to value given. Risk is that the most liquid assets are sold first and the least saleable with the largest bid-offer spread are sold later. The aim is that the last investor out gets their fair share as the first one did, neither more nor less. So systems as well as the spread and quality and liquidity of the asset portfolio are all put to the test. And the insurer’s solvency of course.

    However this insurer seems to have made things additionally complicated with guaranteed rates of return (which are a problem if not matched by asset returns) as well as the strategic investment into the property developer. With heightened withdrawals, the property developer holding becomes an asset concentration issue, and on what terms can you sell the stake?
    If this becomes a run on the insurance company then the danger is becoming a known forced asset seller and therefore market participants extract a much larger pricing discount on what you are trying to sell. Which stresses the insurer’s solvency. Best to get some selling done before any crisis kicks off. Selling also needs to be coordinated by an experienced market practitioner to make it less obvious to market participants the specific names and volumes you need to sell!

    All of the above assumes the assets are otherwise sound, no bad loans or fraud in the mix. Such items would simply make things worse, as we have seen many times over Australia’s own financial history.


    • Excellent post. I thought you would forget to mention possibility of fraud but you that covered in the last paragraph.
      I think these guys have siphoned lot of money so the value of the assets would be far lower than what books are showing.

  2. ResearchtimeMEMBER

    Borrowing for long dated assets using short-dated debt, continually rolled over is the basis of China’s investment industry (40% of total debt issued, mainly by Mum’s and Dads) – or what people call its shadow banking sector!

    Yes it is a Ponzi scheme, and when (not if) it falls over – its a Black Swan right there. Social unrest could be immense. Life savings will evaporate – for everyone!

    Not to repeat myself, but if rumours are true, a week ago big Chinese banks weren’t transacting with smaller banks due to perceived counter-party risk. The big order comes in from the top – The Central Bank comes in and injects $25Bn – then everything is roses again! I mean really???

    This is outside my area of expertise, but this smells like a Lehman moment. China cannot afford to bail out its entire banking industry – and it cannot afford to lower the Yuan without a trade war, US and EU!

    • proofreadersMEMBER

      “China cannot afford to bail out its entire banking industry …” No problem – cover-ups a specialty?

    • RT,

      “…China cannot afford to bail out its entire banking industry – and it cannot afford to lower the Yuan without a trade war, US and EU!..”

      Yes, it cannot bail out its ‘entire’ banking system but is important to distinguish between real banks and so called ‘shadow banks’ which are not banks at all.

      China can support its largely public owned banks – in other words all the big ones – and that is the critical bit as while they operate and continue to operate a complete financial system meltdown can be avoided. Though the value of the Yuan will likely slide.

      What happens to the non-bank casinos/ponzi/shadow bank schemes will be interesting to watch. I doubt the government will be too sympathetic BUT a pissed off gambler/Banana man is still a potential problem for social order so they cannot ignore the problem.

      As for currency related trade wars, that all depends on how the exchange rate is ‘managed’. We have seen a red hot exchange rate world war over the last ten years as central banks have used interest rate policy to drive capital flows and thereby exchange rates.

      If China’s publicly owned banking system is kept afloat and the exchange rate is allowed to ‘move’ it would fall as Yuan are printed and capital flees China. That is not directly manipulating the exchange rate. That is simply the consequence of creating the money that all those bank IOUs represent. Using monetary policy to manipulate exchange rates is largely ignored while CPI inflation remains low.

      If other countries don’t want the Yuan to fall too far they must block non-trade related capital inflows from China.

      But will they?

      Australia’s politicians for one seem happy to suck in as much exchange rate manipulating unproductive capital as possible.

      While China maintains a trade surplus there should be a limit to how far the Yuan can fall but that depends on whether desperate capital outflows are blocked by China or by other countries.

    • Jeremy Bentham

      The Central Bank comes in and injects $25Bn – then everything is roses again! I mean really???

      The feds were injecting $85 Billion US / month. They injected more than $4 Trillion into their banking system. The EU injected at least 2-3 Trillion.

      Honestly – these numbers do not even compare, not even on the most extreme level. Imagine if China announced it was injecting $4 Trillion into its banks like the US did ?

      You just have no sense of balance.


  3. thomickersMEMBER

    Lol! Even back in the 1920s USA, insurers got whole-of-life and endowment products right!

    • Jeremy Bentham

      Do you have any idea where the word PONZI comes from ? Do you have any idea just how many banks and insurers, including life insurers have gone bankrupt and been shut down for fraud ?

      Clearly not.