As several CSRC officials have learned over the past four months, being a “connected guy” vis-a-vis the Politburo does not necessarily mean you are immune when Xi and the Party decide it’s time to make an example of a few “chickens” in order to scare some “monkeys.”

China’s sweeping crackdown on sellers, “manipulators”, frontrunners, financial journalists and anyone else “suspected” of acting in such a way as to sow fear and uncertainty in the wake of the dramatic meltdown in Chinese equities that unfolded over the summer has ensnared money managers, high profile executives, and government officials alike. Earlier this week, it reached a crescendo with the disappearance of Guo Guangchang, known to some as “China’s Warren Buffett.”

As we reported on Thursday, the Fosun chief was “unreachable” according to the company which said only that it was “handling the situation.”

For anyone familiar with Beijing’s “kill the chicken to scare the monkey” campaign, it was easy to venture a guess as to what might have happened. While it seemed obvious that Guo had been “disappeared” by the Party, it wasn’t as yet clear what he was ultimately suspected of doing “wrong.” “Whether Beijing is questioning Guo about his habit of eschewing investments in China in favor of deploying capital overseas or whether Fosun did something 'wrong' in the markets during the selloff is hard to know,” we said.

We now have a bit more in the way of color regarding Guo’s detention and sure enough, he’s being “held in connection with an investigation.” In a statement, Fosun did not divulge Guo’s whereabouts, saying only that he’s helping with “certain investigations carried out by the mainland judicial authorities” and that he is still able to oversee “major matters” pertaining to his businesses.

As FT notes, “rumours of Mr Guo’s disappearance began to circulate in China on Thursday when influential financial publication Caixin cited unconfirmed reports that police had detained him when he arrived in Shanghai on a flight from Hong Kong.” Subsequently, business partners have only been able to establish “minimal contact” - his family has not been able to reach him.

As usual, there’s no word on whether Guo is in fact the subject of the investigation. If you’ve followed the witch hunt - which we recently learned is being run by Fu Zhenghua, a former Beijing police chief responsible for orchestrating an infamous prostitution bust, a campaign against "popular bloggers whose sometimes anti-establishment comments drew the ire of party leaders," and a decree prohibiting police officers from drinking alcohol outside of their homes - China likes to keep the explanations as vague as possible presumably for the chilling effect the ambiguity has on the rest of the market.

Guo, who earlier this year called himself an “apprentice” of everyone’s favorite octogenarian from Omaha, is worth nearly $8 billion, a fact which may have landed him in Xi’s crosshairs. “As China’s economy slows after three decades of furious expansion, conspicuous wealth has become suspect,” WSJ says, adding that “uncertainty about his situation has added to a chill in finance circles.”

As for the wider implications of Guo’s arrest, consider the following from FT:

His disappearance will fuel anxieties in the private sector that the anti-corruption crackdown launched by President Xi Jinping three years ago is being extended to high-profile entrepreneurs and the prime beneficiaries of China’s decades of rapid growth. It initially focused on ensnaring senior members of the government and military and financiers and is now broadening to prominent businesspeople in Shanghai.

Significantly, FT also suggests that “[Guo’s] case threatens to accelerate the pace of capital flight out of China as the country’s wealthy elite scramble to shift their assets offshore and out of reach of the Chinese authorities.”

“This is Richter scale 9 for the private sector in China,” one observer who tracks China's wealthiest people said.

Guo is also well connected in the Politburo. Here's The Journal:

In August, the tycoon was named during the sentencing for corruption of a former senior Communist Party member in Shanghai who had run a government-owned dairy company. Mr. Guo had granted the man favors for unspecified benefits, according to China’s official Xinhua News Agency, which said that Mr. Guo wasn’t accused of wrongdoing. Fosun issued a statement at the time, saying Mr. Guo supported China’s anticorruption push. Like many other entrepreneurs in China, Mr. Guo has also remained close to Chinese leaders with positions on numerous official bodies, while some of Fosun’s businesses have overlapped with government priorities. He has served as a deputy to China’s legislature, the National People’s Congress, as well as represented Shanghai on a high-level government advisory body called the Chinese People’s Political Consultative Conference.

"In March 2012, he met Mr Xi as he was poised to take over as the country’s top leader, and urged him to enact a series of economic reforms, including greater court protection for insurance companies, increased lending by non-bank financial institutions and greater scope for private equity businesses to operate," FT adds.

As we mentioned on Thursday, Fosun spent more than $6 billion buying stakes in 18 overseas companies between February and July. Here's a snapshot:

And here's an org chart:

Due to the fact that Guo has so much influence over the company, his absence (especially if he ends up being detained for a prolonged period) could well have a serious impact, something which WSJ notes was "illustrated in trading Friday when [a] trading halt for its primary business triggered selling in related stocks and bonds."

In other words, it's possible that this entire effort becomes self-defeating for Xi. If the widening probe ends up triggering trading halts and harrowing declines in the assets connected to the targets of the crackdown, then Beijing is simply fostering the type of instability it claims to be stamping out.

Furthermore, if the country's wealthiest people start to get the idea that they too will be targeted and brought up on trumped up charges, then you can bet they will move their money out of the country by any means necessary and no UnionPay POS mointoring scheme is going to stop them. Obvisouly, just about the last thing China needs to be doing right now is creating more excuses for rich Chinese to skirt capital controls just as the CFETS telegraphs a much larger devaluation for the yuan on the horizon.

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Bonus color from Deutsche Bank

Given that the company responded promptly in the past couple of episodes, we think any delay this time could be taken more negatively by the investors. Separately, it seems China has learnt its lessons from the Kaisa episode and hasn't lifted the corporate veil in such cases, clearly differentiating between the management vs. company operations. In almost every instance since Kaisa, Chairmen/founders have resigned, letting new management run the operations. We need to be mindful that Fosun is one of China's largest private sector enterprises and the repurcurssions of a Kaisa-like episode could be huge for China Inc.

Fosun 20s are marked around 15 points lower at ~90 (mid, 10% ytm) amidst thin liquidity, at the time of writing. This is a bit more than the roughly 10 point drop we have seen in recent times in the USD bond space in similar situations (Wuzhou being the latest). Our base case and gut feel at this stage is that the company should eventually be fine. Key risks include resignation of Mr. Guo as Chairman and possible breach of bank loan covenants (though we expect this to be waived, if at all), black box nature of company's operations, etc.