Chinese financial regulators announced on Friday they had temporarily taken over brokerages, trust companies and insurers linked to the embattled group, amid a campaign to stem systemic financial risks in a slowing economy. Regulators took control of Baoshang Bank, controlled by Tomorrow Group, in May 2019 in China's first bank seizure in nearly two decades.
Meanwhile, Tomorrow's founder Xiao Jianhua was investigated more than three years ago amid a state-led crackdown on conglomerates, and has not been seen in public since 2017.
Shanghai-listed Xishui Strong Year Co Ltd Inner Mongolia, a cement and clinker manufacturer with a 51% stake in Tianan Property Insurance - one of the nine companies seized by regulators - fell by the daily limit of 10% in morning trade on Monday.
Baotou Tomorrow Technology which produces and sells chemical products and is minority owned by Tomorrow also saw its shares drop 4% on the Shanghai bourse on Monday.
Shenzhen-listed Zhongtian Financial Group Co Ltd, which said in 2017 it planned to buy up to 25% https://www.reuters.com/article/us-zhongtian-fincl-huaxia/chinas-zhongtian-financial-to-buy-up-to-4-7-billion-stake-in-huaxia-life-idUSKBN1DL052 in Tomorrow-linked Huaxia Life Insurance, dropped by over 8% during the morning session before it narrowed losses to 3.9% in the afternoon. Huaxia Life was another company seized by the government on Friday.
The benchmark Shanghai Composite Index was up 3.11% on Monday, while the main Shenzhen index rose 2.68%.
Xishui Strong Year said in a statement on Monday that the ultimate impact on it of Tianan Property Insurance's seizure was still uncertain. It added that it would actively cooperate with the regulators.
Zhongtian Financial Group said in a statement that its stake purchase was still underway and it was still assessing what the government takeover means and would communicate once that was clear.
On Saturday, Tomorrow lashed out at the state takeovers, in a rare example of public criticism of official action. The statement was quickly removed from its social media account.
Regulators said on Friday that they had taken over the companies for one year, during which their operations will remain normal. They said the takeovers won't change their debt obligations or creditors' rights.
Creditors had total exposure of between 40 to 50 billion yuan ($7.15 billion) in the nine firms, state-backed Shanghai Securities Journal reported on Monday, citing unnamed regulatory sources. It added that the risk of wider contagion was limited.
Regulators took over Baoshang Bank in 2019, citing serious credit risks and sending shockwaves through the financial system.
"Beijing is clearly interested in cleaning up its financial system and taking down some larger companies that have no strategic value to China. The relationship between Tomorrow Group and the troubled Baoshang Bank may have tipped the balance for Tomorrow Group," said Andrew Collier, founder of Orient Capital Research.
In May 2020, regulators announced they had extended Baoshang Bank's one-year takeover by a further six months.
"As the asset clean-up of Baoshang Bank comes to an end, regulators need to concentrate on handling the complicated web of debt of other Tomorrow Holdings affiliates," said Wang Yifeng, analyst at Everbright Securities.
By Julie Zhu and Cheng Leng