Wall Street movers and shakers are widely regarded as part of the solution to the coronavirus-ravaged economy. Chastened by the collapse of Lehman Brothers and the Great Recession for more than a decade, they have been forced to cut companies considered risky and clean up their balance sheets. In this crisis, they are no longer the problem.

The same cannot be said of China. Beijing has made the martyrs of its banks and insurance companies, asking them to lend to the needy, give up profits, and maintain the lives of animals in the trillion-dollar capital markets. But, along with brokers, they remain a troublesome group, far from being strong pillars of the financial system. If anything, Covid-19 has exacerbated credit risk. Lehmann's Chinese moment, when isolated events cross the line into systemic influences, just lurks.

Last Friday, regulators took control of nine troubled firms, controlled by the collapsed billionaire Xiao Jianhua empire under Tomorrow Holding Co. with total assets of more than 1.2 trillion yuan ($ 171.5 trillion). It is one of the largest seizures in modern Chinese history. Xiao was taken out of the Four Seasons Hotel in Hong Kong by the Chinese authorities three years ago and has disappeared from sight since then.

This is unsurprising: Insurance companies have been a problem since at least 2017. Later, a review found that their corporate governance ratings were deteriorating. Companies like Huaxia Life Insurance Co. were, A hijacked firm, sells rules that violate and incorrectly discloses information from the document holder. The insurance authority said it was "determined to eliminate illegal and inappropriate practices." He also found that companies visited financing sources and collected the same assets for multiple loans.

The acquisitions come a year after the acquisition of Baoshang Bank Co when we wrote that the counterparty and solvency risks had come together. The organizers tried to say that it was a unique solution. However, recent events indicate that these problems are exacerbating and spreading. At some point, the chain of loans and liquidity will be affected.

Beijing once again evaded allowing the market to market these possibilities. "The dilemma is fundamental," analysts from the Rhodium group wrote after the Baoshang accident. Authorities may allow the market to resolve the flaws or try to maintain "stable" credit production that carries increased risk. They can't get both. By effectively assuming counterparty risk, regulators are hurting the credibility of the market at a time when tension increases as funding channels contract.

To be fair, they didn't have many options. A significant depreciation of assets caused by Covid-19 could eliminate the book value of the shares of these companies. Take Huaxia's life. Over the past decade, through the mass sale of high-performance savings products, it has become the fourth-largest insurance company in China, with nearly 600 billion yuan in total assets at the end of 2019. Its assets-to-equity ratio stood at a whopping 26 times

It is not difficult to imagine large assets behind closed doors. Given the effects of the Covid-19 business collapse in the second quarter, the worst bond loss in a decade has caused investors to deal with losses even in relatively safe wealth management products, not to mention non-credit investments riskier. In the first three months of the year, data provided by CLSA Ltd. The book value of Huaxia Life has decreased 23% quarterly, due to the losses of its investments in the market. It is not surprising that the insured is on the radar of regulators or that they are trying to send a message.

However, China's financial woes extend beyond the limits of the escaped businessman's overly extended balance sheet. Since 1995, the central bank or other agencies have taken over just 12 companies, half of them over the past year, excluding the companies that were last week. Some large trust companies have turned away from the authorities, unable to pay the origin and interest of the investor in recent months.
In light of the recent acquisitions, regulators will send teams to take on the roles of shareholders, managers, and management. Other finance companies, including some of China's largest insurance companies and brokerage houses, will end up as trustees. In theory, they would pay to reduce troubled companies and invest assets.

Call it what you want, but this is the Chinese version of the financial infection. Just plugging holes won't cut it. How many companies can regulators try to save? How much will the capital be injected? Can they find willing shareholders and white knights?

The answers to these questions will not come without pain. According to CLSA, 11 insurance companies own roughly 15% of the market, and 2.4 trillion yuan of total assets "will walk the tightrope" with regulators. On average, if the value of your assets is 2% to 5% lower than what they showed in 2019, then the excess capital, the capital in the red regulatory minimum, has been erased. If Beijing ever needed to save everything, the costs would be prohibitive. If not, insurance companies will have no choice but to dispose of the assets, which could threaten the overall market.

Until now, Beijing has not successfully dismantled its troubled financial empires. In the two years that an overbought buyer for Waldorf Astoria in New York, Anbang Insurance Group Co., was caught. Attempts to ditch his assets and find strategic investors have become a long and painful process.

It may be time for Beijing to face its fears and let some companies fall out of the abyss. By doing so, you will finally be able to really memorize important things.

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