Those seeking a clear understanding of China's financial policies may have to turn to the country's courts, where stiff sentences are being handed down for deals made years ago.
A recent New York Times report suggested that a belated government crackdown on financing and investment practices was the driving force behind an 18-year prison term given to Anbang Insurance Group founder Wu Xiaohui on May 10.
Wu was found guilty of "fundraising fraud and embezzlement of corporate funds," said the Shanghai Municipal No. 1 Intermediate People's Court, according to state news agency Xinhua.
The court found that Wu "concealed his shareholder status," masking his control over Anbang, which figured prominently in China's overseas investment boom over the past five years.
Among other things, Wu allegedly "absorbed a huge amount of funds" by selling "investment-purpose insurance products that exceeded approved amounts," shifting funds to pay for personal debts as well as Anbang investment deals.
The fraud amounted to 65.2 billion yuan (U.S. $10.2 billion) in addition to 10 billion yuan (U.S. $1.5 billion) of embezzlement, the court said.
At his trial, Wu expressed remorse after initially voicing doubt that he had broken any laws, The Wall Street Journal reported.
The Times portrayed the punishment as a message to other free-wheeling investment groups that China's wild ride of foreign buyouts with risky financing has come to a halt.
"Mr. Wu's sentence caps a months’ long effort by Beijing to make Anbang an example for other big Chinese conglomerates that borrowed heavily to buy up high-profile trophy assets like hotels and Hollywood studios," the paper said.
Anbang was known most widely for its deal to buy New York's Waldorf Astoria hotel for U.S. $1.95 billion (12.4 billion yuan) in 2014. That was before regulators began to take the risk of runaway investment expansion seriously.
‘Dangerous’ debt growth
For well over a year, China dismissed repeated warnings from the International Monetary Fund about "dangerous" debt growth and risky financial practices.
"International experience suggests that China's credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked slowdown," the IMF said in an August 2017 staff paper, sounding the third such warning in a little over a year.
China routinely responded by downplaying the threat with selected data on sovereign debt levels. That attitude has changed with President Xi Jinping's focus on financial risks as one of the "three big battles" to be fought by 2020, along with poverty and pollution.
"Currently, financial risks are volatile and frequent," Xi wrote in a recently released book on national security, cited separately by The Times.
"Although systemic financial risks are generally under control, risks are accumulating from nonperforming assets, liquidity, bond defaults, shadow banks, external shocks, a property bubble, government debt, and internet financing, and the financial markets are also in a mess," Xi said.
The major worry over the foreign investment spree by groups including Anbang, HNA Group Company Ltd. and Dalian Wanda Group Company Ltd. is that it was financed with high-yielding wealth management products (WMPs) and other pledges that could not be paid.
The groups have come under regulatory pressure to sell their real estate and other overseas assets that they amassed during the buying binge. China's regulators apparently viewed Anbang as the worst case for risk.
On Feb. 23, the China Insurance Regulatory Commission (CIRC) announced an immediate takeover of Anbang by government agencies for one year, citing solvency threats.
The move came nine days after regulators warned all insurers against using debt-backed domestic assets as collateral for borrowing overseas.
With the tough penalties on Anbang, China may now be using the courts to compensate for lapses of regulatory policies in the past.
Anbang crossed a line
Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said that Anbang crossed a line that was not previously well-drawn.
"Anbang is legitimately connected to risky lending, since the acquisition roll they went on was enabled by getting credit despite moving outside their core business," said Scissors by email.
"And in the Chinese system, sending someone to prison after the fact is a standard signal that they are serious about better loan review now," he said.
The government's response to risk now appears to be a hodgepodge of ad hoc decisions on withholding or extending credit, dispensing fines for vague infractions to signal tighter supervision, and allowing some bond defaults.
Last month, the newly-organized China Banking and Insurance Regulatory Commission (CBIRC) said it handed out 646 penalties against financial institutions and 798 more on individuals in the first quarter. Fines totaled more than 1.1 billion yuan (U.S. $184 million) for "defective corporate governance and breaches of macro-regulation policies."
"All forms of violations have been seriously inhibited to forestall systemic financial risks," the agency said.
In mid-March, the China Securities Regulatory Commission (CSRC) also said it had penalized 339 listed companies for violations including insider trading and market manipulation since last year as part of efforts to control financial risks.
China's police have also taken credit for reducing financial risk with claims of catching more than 90,000 economic crimes since 2017, including illegal fundraising, pyramid schemes and underground banking, the Ministry of Public Security said.
But the risk reduction campaign has hardly been a model of consistency, or for that matter, coordination, despite Xi's evident push from the top.
Regulators have sprinkled interventions in cases like that of Anbang with instances of tough love, allowing some risks to take their course.
Such was the case of Beijing-based developer Zhonghong Holding Co., which slid into default in late April with overdue debts of 2.3 billion yuan (U.S. $364 million) after buying a 21-percent stake in California's SeaWorld Entertainment last year, according to Reuters reports.
At least 20 corporate bond defaults have taken place in China so far this year, the South China Morning Post said.
Last week, a unit of troubled CEFC China Energy Company Ltd. added to the list after the collapse of a deal to acquire shares in the Russian oil company Rosneft. On May 21, CEFC Shanghai International Group Ltd. missed bond payments totaling more than 2 billion yuan (U.S. $327.3 million), Reuters reported.
Has tough love gone too far?
The risk-control mission has already sparked fears that tough love has gone too far, leading to the loosening of bank purse strings with a surprise lowering of the reserve requirement ratio on April 25.
In April, new yuan-denominated loans of 1.18 trillion yuan (U.S. $186.4 billion) topped forecasts as outstanding loans rose 12.7 percent from a year earlier, Reuters said.
The credit support for the economy signaled that the government could continue to take steps in seemingly opposite policy directions in the name of controlling financial risks.
"For investors watching the Chinese economy and rates, the message is clear: China hasn't somehow magically cracked the code of debt-free growth," The Wall Street Journal said in its Heard on the Street column.
Rather than worrying about bank lending and debt, regulators are concerned mainly with where the money comes from, the column suggested.
WMPs may be out, but other older forms of shadow financing still appeared to be in, the paper said.
Reports from a special meeting of China's top political advisory body painted a mixed picture of the government's progress in controlling financial risk.
Speaking to the Chinese People's Political Consultative Conference (CPPCC) meeting on May 15, Vice Premier Liu He said the country is "entirely confident in, and capable of, winning the battle to prevent and resolve financial risks," the official English-language China Daily reported.
Other comments appeared less sanguine.
Shang Fulin, deputy director of the CPPCC's economic committee and a former top banking regulator, said that risks are "largely under control."
But he added that "pressure of systemic financial risk remains quite heavy," citing "macro leverage levels, the real estate market, local government debt, irregular financial activities and the lack of a mature social credit system."
A Xinhua report from the meeting also carried a comment from Liu suggesting that efforts to deal with the risks of past credit policies are still at an early stage.
"People should understand that capital is needed to start a business, money borrowed must be paid back, and there are risks in investment and prices to pay for wrongdoing," Liu said.
The policy mishmash may leave it up to regulators and courts to decide when financial risk has gone too far, leaving investment groups to watch out for the barn door and whether it is swinging open or closed.
"The Chinese assume this is an implementation problem rather than a structural problem," said Scissors.
"In particular, they think they've cracked down enough that loose money will bring happy economic and political benefits but carry much less financial risk than before. Won't work," he said.