Beijing's unprecedented takeover of private insurer Anbang confirms that toxic risks lurk in the world's second-largest economy while signalling the state's tightening grip on China Inc. despite reform rhetoric, analysts said.

Government regulators seized control of the Anbang Insurance Group on Friday, saying its debt-fuelled foreign acquisition binge left the company in financial peril and that high-flying founder and former chairman Wu Xiaohui would be prosecuted for fraud.

The takeover, to last at least a year, was the most striking step yet by regulators to rein in dizzying debt levels and a clear sign that the government saw something frightening in Anbang's books.

"This move has huge significance. If something went wrong with Anbang it would lead to massive bad loans in the financial system," said Beijing-based economist Hu Xingdou.

China has moved aggressively over the past year to slam the brakes on companies like Anbang, which ran up gargantuan debts to fund pricey overseas acquisitions.

Such companies have become known as "grey rhinos" -- financial beasts that could charge quickly, with damaging results.

Despite expert warnings that China's spiralling debt could spark a meltdown with global repercussions, the communist regime has steadfastly insisted that any risks remain controllable.

- 'Serious problem' -

But a look under Anbang's hood has clearly spooked Beijing, analysts say.

Anbang raked in cash largely by selling short-term policies promising some of the highest returns in the market, and rose from obscurity to quickly become one of China's biggest insurers.

With the proceeds, the Beijing-based firm spent billions overseas, snapping up New York's iconic Waldorf Astoria hotel in 2015 for nearly $2 billion, adding other pricey hotel and financial assets around the globe, and even making an aborted $15-billion bid for Starwood Hotels.

But Beijing's clampdown on risky financial practices since 2016 crippled Anbang's fund-raising.

"It's a serious problem. There may now be a flood of redemptions coming through," said Christopher Balding, a Peking University economics professor.

"If you are a $315-billion company like Anbang and have to write down even just 20 percent of your assets, that's almost a $100-billion hole. That's big even by China's standards."

Many Anbang holdings look likely to be sold off.

Attention will now shift to other acquisitive "grey rhinos" like HNA, Fosun and the Wanda Group.

Those companies have already been pulling back, with Wanda in particular selling off billions in assets recently to stay solvent, and are not yet seen as imminent government takeover targets.

- Growing state control -

But the Anbang move sets a precedent of state intervention in the private sector that is expected to recur.

President Xi Jinping has become the most powerful Chinese leader in decades by pushing a programme of party control in all walks of life.

Fraser Howie, co-author of a book on China's financial system, said Anbang's takeover is a fresh example.

In an essay, he wrote that government promises of economic reform to let market forces lead "really have no weight anymore".

"While further regulatory takeovers may be unlikely, government-orchestrated bailouts and restructurings are almost certain to come," Howie said.

"Xi's China seems to care less and less about the distinction between the private and state sectors."

China's debt crackdown is generally lauded as necessary to avert a credit crisis, but growing state control worries economists too.

It curbs the natural and healthy distribution of capital, and prevents an efficient modern economy from developing, said Julian Evans-Pritchard, China economist with Capital Economics.

"China won't be able to achieve the growth rates that it could with better resource allocation," Evans-Pritchard said.

"State control gives the appearance of stability, but growth continues to slide and in a decade you're at three percent growth."

China's GDP grew 6.9 percent in 2017, robust but well down from double-digit growth a decade ago.

- Blaming Beijing -

Anbang's takeover also means that the Communist Party is now the ultimate owner of the Waldorf Astoria and other Anbang assets, and the spectre of such state involvement could deter foreign regulators from approving some future Chinese investments overseas, analysts add.

With its vast war chest, China's all-powerful government is expected to contain financial risks.

But the current mess is Beijing's own fault, said Balding, the Peking University professor.

Xi's government and state media extolled the then-accelerating wave of overseas acquisitions just a few years ago, apparently oblivious of the risks.

Chinese regulatory approval is necessary for major overseas acquisitions by the country's firms, meaning regulators allowed many now considered questionable, he added.

"You have to lay the blame at Beijing's feet," Balding said.

"Companies like Anbang clearly got drunk and got behind the wheel, but Beijing was plying them with beer and giving them the keys."

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