Chinese Insurer Warns Of "Mass Defaults, Social Unrest" Due To "Mass Redemption" Run

Tyler Durden's picture

One month ago, China came "this close" to the one event which terrifies Beijing more than anything: a run on China's shadow banks.

As a quick reminder, 150 customers of China's Mingsheng Bank, the country's largest private bank, were furious in mid-April when they learned that some 3 trillion yuan invested in Wealth Management Products, the backbone of China's shadow banking system, had vaporized after bank employees had engaged in fraud and embezzled the funds without ever investing it (later it emerged that Mingsheng employees had put the money into “cultural relics” and jewelry, for their own use).

And while fraud and embezzlement are both endemic in China, the bigger concern raised by the article was the threat of a bank run across China's massive and unregulated, nearly $10 trillion shadow banking system. Indeed, while there have been numerous allegations and warnings that China's entire shadow banking facade, dominated by WMPs and other "investment products", is nothing but a giant ponzi scheme in which  recoveries - should there be a bank run, a topic recently discussed on Bloomberg - would be non-existent if there is ever a bank run, defaults of WMPs issued by big banks – and this case an unapproved WMP – are rare, as are shadow bank runs.

For now.

However, in a stunning announcement made by one of China’s largest insurers, Foresea Life has warned of "mass defaults and social unrest" unless China's regulator lifts a recent ban on its issuance of new products. In a letter to China’s insurance regulator, first reported by the Financial Times, Foresea Life Insurance which is a heavy investor in WMPs, has warned  that the company expects "redemptions" of 60 billion yuan, or $8.7 billion, this year and might be unable to meet payouts unless it is able to sell new products.

Jut so there is no confusion, this is the definition of a ponzi scheme, and now that it has been so explicitly framed the result could be even greater redemptions, i.e., "bank runs" across companies that invest in WMPs.

Foresea's displeasure is linked to a December decision by the China Insurance Regulatory Commission (CIRC), which banned Foresea for three months from applying to sell new products. Two months later, in February, the agency banned Foresea chairman Yao Zhenhua, China’s fourth-richest man, from the industry for 10 years.

Questions about potential fraud at the company have remained unanswered, however the life insurer which allocated billions to WMPs in pursuit of yield (what else) was all too vocal in a letter dated April 28, in which Foresea asked 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”. According to the FT, the term “mass incidents” is commonly used in China to describe demonstrations, protests and riots. It was also used by Hank Paulson in 2008 when demanding a blank check from Congress threatening the US with widespread panic unless the US banking sector was bailed out.

That this warning has now moved to Chinese users of shadow banking is troubling.

To be sure, this is not the first time a near-insolvent Chinese company has threatened with social unrest if it does not get a bailout. One month ago, China's - and the world's - biggest aluminum producer China Hongqiao Group demanded that both the Chinese Non-Ferrous Metals Industry Association and the Chinese government come to its aid, warning in its March 4 letter of “serious effects” if nothing is done, including “regional systemic financial risks” and “dramatic social unrest.” Yet while the fallout from one major commodity company would be largely contained, mostly to its own angry workers, the social panic and mass defaults resulting from the failure of China's $4 trillion Wealth Management Industry, would have far more dire implications.

Some more background on the troubled life insurer courtesy of the FT:

Foresea is a unit of Baoneng Group, a property and financial conglomerate that Mr Yao also chairs. Baoneng made headlines last year by attempting a hostile takeover of China Vanke, one of China’s largest residential developers.  Baoneng has used the sale of so-called “universal insurance” products to finance its stake in Vanke and other listed companies. Such policies are, essentially, investment vehicles offering high yields and guaranteed payouts on maturities. Distributed through banks, they bear little resemblance to traditional insurance, which pays out only in the event of a risk incident such as death, illness, or accident.

The mass proliferation of such "shadow banking" products, largely as a result of deregulation of the insurance industry in recent years, has led to the sharp rise of universal insurance sales, which has helped groups such as Foresea and Anbang Insurance Group to grow. As a reminder, Anbang - which has a very questionable reputation - is also one of the most prolific acquirers of global corporations as it seeks to find high yielding targets for its "shadow" funds.

As the FT also notes, while Foresea’s premiums soared from Rmb32bn in 2014 to Rmb100bn last year they since tumbled 61% in the first quarter this year.

More troubling is that the date of Foresea’s letter indicates that, by late April, the regulator had not yet approved new Foresea products, despite the expiration of the three-month ban. In a statement on its website late on Wednesday, Foresea said that “the company’s operations are normal and its cash flow is stable”, adding that it earned Rmb1.4bn in profits in the first quarter.  Needless to say, it wouldn't say anything else until it was too late (see Canada's Home Capital Group).

On one hand, the Chinese regulator's initiative to limit WMPs is a welcome change to the Chinese funding "wild west." It was observed in the latest PBOC monthly credit update, which revealed that for the first time in a decade, a key component of China's shadow funding, Entrusted Loans, declined.

 

The FT adds that in addition to Foresea, the CIRC has moved to contain universal insurance in recent months, amid President Xi’s call to curb financial risk. Analysts warn that the high yields offered by universal insurance force issuers to take risks in order to earn the returns necessary to meet promised payouts. 

Many universal insurance products ostensibly carry long durations of five or even 10 years but the policies often include generous redemption terms, enabling investors to cash out of the products with minimal penalties. 

Meanwhile, Foresea’s warning that "mass redemptions" could leave the group unable to meet payouts highlights the liquidity risk created by taking on short-term liabilities to purchase long-term, illiquid assets.  In a further crackdown on China's unsustainable shadow banking system, in May the CIRC imposed a similar three-month ban on Anbang and accused the group of “wreaking havoc” in the market with aggressive sales tactics. The agency specifically criticized Anbang for selling products with short maturities.

On the other hand, however, while such a regulatory crackdown is long overdue, should the "shadow" funding of "insurers" like Foresea (and Anbang) be halted, the company  - which by its own admission is a ponzi scheme - would disintegrate.

For now, however, it faces a more immediate challenge: what happens if Foresea is not granted regulatory relief as it demands? If the insurer is unable to resume issuance of its traditional shadow funding products, and should the "redemption run" accelerate, the company will have no choice but to eventually demand a PBOC liquidity injection or outright bailout. Considering how generous the Chinese central bank has been, this request will likely be satisfied.

But a far bigger problem, one which not even the PBOC would be able to contain, is what happens if accelerated "redemption" problems, currently limited to just Foresea, spread to the rest of the nearly $10 trillion shadow banking industry.

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shovelhead's picture

Shiton Yue Wealth Fund- All Unicorn Investment Group.

Are they implying my Chinese investments in Unicorn feed may be at risk?

lemontree2's picture

I SEE no worries here. This is bullish. Buy banks. Good profiti.

Cordeezy's picture

And here we go.... hide your kids hide your wife!

 

www.escapeamazon.com

 

 

Chet Ricco's picture

This video is symbolic of the banking industry. People being destroyed and all there is to help are a few impotent spurts of water that fall far short of their target. Actually what would be a better representation would be if instead of water they were spraying gasoline.

Publicus's picture

Confiscate the assets of all those that benefited.

BitchezGonnaBitch's picture

Easy way to avoid unrest in the streets - have the perps at Foresea  senior management punished and be seen to be punishing them.

Going medieval would earn extra credits from the crowd - flaying, roasting, boiling etc. I can almost guarantee that would settle the  public anger very quickly. 

seabass974's picture

how do i get out of this chickenshit outfit?

 

Private Hudson - USS Sulaco - 2179

silverer's picture

Stack your way out! lol! It's an "alien" concept to most sheeple.

silverer's picture

We don't have the money because the money never existed. Imagine that. You deposited a "phantom".

robertocarlos's picture

I know it's a typo but if 150 Chinese are missing 3 trillion Yuan and things are still Ok then 10 trillion Yuan vaporizing should only affect 500 Chinese. Big deal. And even 500,000 Chinese getting ripped off wouldn't be so bad.

TheAnswerIs42's picture

From

  W  M   P
57 4D 50  10101110100110101010000

to

  W  M  D
57 4D 44  10101110100110101000100

Only a few bits away.

Fragile! Do not Drop!

whatisthat's picture

I would observe this post is one example of corruption to not enable China a major SDR engagement.

Manipuflation's picture

What is it that we are redeeming?  I don't have to redeem anything. 

decentralisedscrutinizer's picture

 

At this stage of the System’s take-over it’s becoming obvious that all our economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where its military force resides. The only way to regain our sovereignty as citizens of a constitutional republic is to severely curtail the privileges of the corporations doing business here. To remain a free nation, we have to stop granting corporate charters to every “suit” that comes along without demanding a well-defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't take the incorporation of private transnational banks for granted anymore. The government must be held responsible only to the electorate, not fictitious entities, if we are ever to restore sanity, much less prosperity, to the world.

 

 

 

A loop hole in our Constitution allowed corporate charters to create a swamp of corruption around our capital. It is a swamp that can't be drained at this point because the Constitution  doesn’t provide a legal drain. This 28th amendment is intended to provide that drain so Congress can pull the plug; ASAP. As a matter of political practicality we must rely on the Article 5 Convention for which the electorate will need consensus beforehand. An Article 5 Constitutional Convention could solve that problem. This is what I think it will take to save the world; and nobody gets hurt:

 

 

 

28th Amendment

 

Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to:

 

1, prohibitions against any corporation;

 

a, owning another corporation,

 

b, becoming economically indispensable or monopolistic, or

 

c, otherwise distorting the general economy;

 

2, prohibitions against any form of interference in the affairs of;

 

a, government,

 

b, education, or

 

c, news media, and

 

3, provisions for;

 

a, the auditing of standardized, current, and transparent account books, and

 

b, the establishment of a state and municipal-owned banking system

 

c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.

 

 

 

The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual States, smaller sovereign nations, and eventually to buy out the Federal government itself. Now that these fictitious entities own the USA and command its military infrastructure, by virtue of the Federal Reserve Corporation, and run it by virtue of regulatory capture, MSM propaganda, and Congressional lobbying they’ve set their sights on the creation of an all-inclusive global financial empire. The US Constitution is the “Charter” of that global System. Only we, the people, can amend it.

    

Librarian's picture

>The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”.

Nor should anyone expect to wield supreme executive power just because some watery tart threw a sword at him/her.

Same as it ever as.

barysenter's picture

And It's... ... ...Gone!

whatswhat1@yahoo.com's picture

Big battle currently pitting major insurance companies, such as, State Farm and Alstate, fighting to limit their responsibility to search for beneficiaries on whole life death benefit policies.  They are holding tens of billions of dollars payable to beneficiaries and they are not doing much to locate anyone.

MaxDemon's picture

The big difference is that they would not get to keep the funds, they would escheat.  What the insurance companies do not want is the cost and bureaucracy they have to go through, they want to be able to just give the sate the money and be done with it.

arby63's picture

This partially why I say the Chinese have been aware of their financial "pickle" for a long time and they are none anxious to get into a global economic pissing contest.

Things have been going quite well for China for the last 35 years. There does come a time, however, where they have to play a little more fair when it comes to manufacturing and trade.

Paracelsus's picture

  I don't see much interest in the concept of deleveraging here in America.

When a hedge fund takes a hit they have to make good the terms of their bank loans,

which means they need cash quickly,which means they have to dump, or "firesale" an asset

into a market at the same time as everyone else is doing the same. This drives down the asking prices

on the assets, with supply and demand working, and shortly the hedge fund has to repeat their process.

I was in a state of shock when the 2008 bank runs started. The shorting was enormous, and must have been

with borrowed money.The vultures smell blood, short the banks' shares,which means the bank has to sell

something quick to bolster the share price,and the downward spiral gathers momentum.

The Chinese are sitting on a warehouse full of T-Bills and if they get desperate they will dump these

to prop up their systems. There has been a great deal of gold going to China, and this is a worry.

Greenspan,Bernanke, all those clowns have created a monster which they cannot control.

If, If they had allowed things to fail there might have been a different outcome. 

Moral Hazard. Get's ya every time...

There is no way the USA can prop up the Canadian Banking system by printing.

Our currency would be the laughing stock of the world...

 

CaptainMoonlight's picture

Take the heads off the people stealing your money and defrauding you. That way they can't do it again.

GracchusBrothers's picture

 

So all the tea in China ain't worth diddly-squat?!

IENTJ's picture

Next year, the human-organ trade will lift the Chinese economy ...

booboo's picture

You mean A rising hide lifts all boats?

conraddobler's picture

The process is agonizingly slow then will fail all at once.

The shadow banking problem in China is as good a candidate as any to finally kick it off.

To get to actual failure it will require a problem that printing can't fix without itself causing a disaster.

The too big to fail banks can be bailed out because it's just like printing money to replace money and if done correctly as unpalatable as it may be it's just running in place

However wherever this is done a price is paid in non price discovery and in inefficiency ask stupid is not only allowed to survive but actually out compete competence

Eventually the longer you go with this the closer you get to complete incompetence and at some point this blows everything to hell as reality begins to be so warped by the cumulative fixed that it no longer functions at all

This creates odd knock off things like a massive shadow banking system house of cards that regulators can't paper over easily because no one knows who they are which leads to having only the option to shower the entire system with new money. This reaches a point somewhere where it breaks the very last herd ability to rationalize it. At that point a stampede starts to cash in. Once that starts it's over as the only fix is to make the whole shadow system whole which in turn then violates the currency itself and boom it's over in a flash

That is how it will go down

Then tanks will roll

SERReal1's picture

Paging Mr. Madoff.....

MrSteve's picture

MrSteve Global Balance Enterprises is now offering

a high-yield personal equity investment instrument

 

Wealth Management Product Helper....          and Your Happiness is Guaranteed!

 ®, SM, TM, Patent-Pending.

omi's picture

The story here is 

 

A) Wealth management products is moving money out of the country via "creative" means.

 

B) FT and other US fake news are trying to publish articles to persuade Chinese that their economy will fall off the tracks in an effort to prolongue US dominance of financial markets.

 

C) China has pushed out over 2T of USD of credit from their financial markets, so they are less controllable by USA-based financial entities, and USA is really pissed about it.

JLee2027's picture

If China's financial mess collapses, there will be no stopping the spread.

JLee2027's picture

Its the motie cycle of collapse and rebuild

DaNuts's picture

'It later it emerged that Mingsheng employees had put the money into “cultural relics” and jewelry'

So the bankers know what to do with paper. Turn it into antiques and gold.

truthalwayswinsout's picture

10,000 Bernie Madoffs just waiting...

are we there yet's picture

Chinese banks eat your money and then an hour later are hungry again.

Dilluminati's picture

Confucious say: Chinese banks eat your money and then an hour later are hungry again.

Eddielaidler's picture

They say never go full commie. As long as they can shut the people up they can go full commie again and blame it on capitalism. ow that's a default you can't argue with. You are left with you land,resources and human batteries.

Sudden Debt's picture

yeah... ponzi... and they explain it so well...

the sad part is that 99% of the people who you would show this would think that's all just but logic...

 

kenny500c's picture

Just like me! I can't possibly make my credit card minimum payment unless I get a new credit line.

It's worked so far.

squid's picture

Once again, let us review.....

Question:

Which government on planet earth has been encouraging its citizens to purchase and hold gold and silver?

Answer:

China.

Which citizens, in a triumph of central bank fiat brain washing, have for the most part refused to put their money into gold and silver and instead put their money in the 'supposed' high interest paying wealth management products?

Answer:

The Chinese.

Question:

Which currency is garenteed to be devalued SHARPLY in the very near future to bail out the REAL banking system?

Answer:

The Chinese Yuan.

Question:

What is the ONLY example of a government WARNING its people to hold gold because the state's fiat currency will need to be devalued to bail out the local fractional reserve banking system?

Answer:

China.

 

And yet, here we are. You can lead a horse to water, by the nose no less, and still, you cannot force it to drink.

 

As draconean as the Chinese Commy Party is, 5-6 years ago they gave FULL WARNING to their citizens to buy and hold gold and silver. The FED, ECB or Congress have never done that.

 

Squid

Dilluminati's picture

Time to sharpen the f0cking chopsteeks and open that fortune cookie that says you better have me f0cking money!

I be all bruce lee on that bankes ass

conraddobler's picture

We are like horses after they invented cars.

You know there used to be nearly as many horses as peoplle on earth, probably more.

Not anymore, not anymore.

robertocarlos's picture

Most of them had trouble counting to 5 so they had to go.

romanmoment's picture

Still the funiest thing I think I've ever seen on TV.  Whoever did that should get an award.

Ban KKiller's picture

Chase that yield! Risk? No, really? Yeah, Ponzi to a "T". 

Must be great to have an uneducated public. Oh, wait...

globalintelhub's picture

Open the floodgates for starved US investors .. http://magicfxstrategy.com/

romanmoment's picture

If I were a Westerner living in China I'd be thinking about my SHTF escape route.  Asia, China is particular, is not very kind to foreigners when the other shoe drops, they kill like ravenous dogs.  And, the low eduction rate and passive-resistive culture means that heads are going to get lopped.  

Beware my friends.