BEIJING - The
State Council, China's cabinet, recently issued a
circular allowing insurance companies to increase
their investment in domestic and overseas
securities markets and expand the scope of their
investment into other sectors. Since, in general,
insurance-company profits derive mostly from the
reinvestment of customer premiums, the measure is
expected to benefit the profitability of the
Chinese insurance sector fundamentally.
According to the circular, Chinese
insurers will be encouraged to invest, directly or
indirectly, in overseas capital markets, with the
investment proportion increased step by step. They
will be encouraged to invest in more types of
securities products; real
estate and venture capital on
a trial basis; and to purchase shares in
commercial banks and securities brokerage houses.
"It is an important move and will benefit
the development of the industry. China doesn't
have enough financial products for domestic
insurers to invest [in]," said Wu Dingfu, chairman
of the China Insurance Regulatory Commission
(CIRC).
Professor Hao Yansu, director of
the insurance department in the elite Central
University of Finance and Economics, said: "There
has been no official document of the central
government relating to the insurance industry for
20 years. This document will play a major role for
the industry to make a breakthrough."
According to
Wu, the actual investments of insurance
companies in the Shanghai and
Shenzhen stock markets, as a proportion of total
assets, will likely increase from
the previous 1% to 4%. Though insurers are
permitted by regulations to invest up to 5% of
their assets in the domestic stock market, such investments
have not reached that level in practice.
To improve their investment earnings,
insurers were given the go-ahead to channel 5-10%
of their combined yuan-denominated equity funds
into overseas markets in April this year. That cap
is expected to rise to 15%, Wu said.
CIRC
statistics show that the total assets of China's
insurance industry reached 1.68 trillion yuan
(US$200 billion) by end of May. The industry's
investments totaled 987.168 billion yuan by end of
May.
In March the CIRC also issued a
circular giving the green light permitting
insurance funds to go into state-level projects
involving the transportation, communications,
energy, civil construction and environmental
protection sectors.
Following the green
light, China's four major insurers - Ping An of
China, China Life Insurance Group, PICC Property
and Casualty Insurance and Taikang Life Insurance
- piloted their first investments in the country's
infrastructure sector. The four were jointly
choosing infrastructure construction projects in
which to invest a total of 12 billion yuan, the
China Securities Journal quoted an authorized
source as saying. The 2010 Shanghai World Expo,
highways, Shanghai subway and airport construction
are the available projects.
Insurance
funds invested in infrastructure must come from
insurers' own reserves and other funds were
banned, a CIRC official said. Later, such projects
would be able to seek investment from
non-insurance sources, such as the stock exchange
or inter-bank market. The official also explained
that the CIRC was piloting the project by
requiring the four insurance companies to invest
jointly to reduce risks.
The State
Council's circular also encourages insurance
companies to strengthen cooperation with banks and
securities companies. Analysts see this as a move
paving the way for cross-sector operations in the
financial sector in the near future.
Currently, the three financial sectors -
banking, insurance and securities - are strictly
restricted to operating separately. In other
words, a bank cannot participate in insurance or
securities businesses; an insurance firm cannot
become involved in banking or securities
businesses; and so on. But the perception has
grown in recent years that this stipulation has
restricted the growth of each sector.
To
some extent, the separation of financial
industries in China has parallels with the
regulatory regime in the US after the
Glass-Steagall Act of 1933, which separated US
banks from securities firms. However, the
Glass-Steagall law was supplanted by the
Gramm-Leach-Bliley Act of 1999, a reform which led
directly to the formation of combined financial
services firms like Citigroup. The current changes
would make China's financial-sector regulatory
regime more similar to the current US regime, as
opposed to the system prevailing prior to 1999.
Under the new policy, the CIRC is backing
further cooperation between insurers and banks.
"We support insurance companies buying into, or
even taking controlling stakes, in well-managed,
profitable banks that have a strong customer
base," Wu said.
Insiders disclosed that
the insurance regulator was working to map out
details on investment into banks. An insurer
investing in unlisted banks, for instance, will
have to choose one with a capital adequacy ratio
exceeding 8%, whose total assets stand above 50
billion yuan and whose non-performing loan ratio
is below 5%.
"But the investment ratio
that insurers can put into banks will not be
high," Professor Hao said.
Ping An
Insurance, China's second-largest life insurer, is
currently bidding for a 60% stake in Shenzhen
Commercial Bank through its investment arm Ping An
Trust & Investment Co Ltd. According to Liu
Mingkang, chairman of the China Banking Regulatory
Commission (CBRC), commercial banks will be
allowed to set up insurance businesses. The
banking regulator is drawing up rules with the
central bank and the insurance regulator to give
broader scope to lenders on insurance and
brokerage businesses, Liu added.
Yang
Chao, chairman of the country's largest life
insurer, said: "China Life will be the largest
beneficiary of the new policy, given our wide
outlets and big market shares."
China Life
takes a 44% market share in the life-insurance
sector. The firm plans to take advantage of the
new policy to achieve further strong growth in the
11th Five-Year Plan (2006-10) period, Yang added.
"But this time, we hope to make some breakthroughs
in our business structure, profitability and
investment returns."
China Life is soon
expected to get a 16.2% stake in CITIC Securities,
becoming the second-largest shareholder of the
firm. "Although the expanded investment channel is
a piece of good news for us, we should take a more
cautious approach since risks rise accordingly,"
said Yang.
