What are the main factors affecting Chinese investment in overseas insurance assets?
2019-12-11 15:04 Wednesday
Since July last year, China's State Council has promulgated 11 measures to further expand the opening-up of finance to the rest of the world, covering various financial fields such as banking, insurance, securities and funds. Recently, the Executive Committee of the State Council has confirmed that restrictions on the business scope of foreign banks, securities companies, and fund management companies in China have been completely lifted, and the newly-revised regulations on the management of foreign banks and foreign insurance companies have been implemented.
It can be seen thatChina is vigorously encouraging the financial industry to improve global competitiveness and internationalization.
The investment area of insurance funds is also gradually being expanded in an orderly manner. More investment channels including financial derivative products were gradually released this year, and insurance companies are eager to test the waters in this sector.
Avoid risks while opening-up
Chinese investment in overseas insurance funds began in 2004. In the past fifteen years, it has experienced a process from initial exploration to gradual maturity. Overall, under the promotion and guidance of national policies and regulatory systems, a sound and sound development momentum has been maintained.
Investment in overseas insurance funds has gone through two stages. The first stage was the exploratory period. Before the new foreign exchange policy was introduced from 2004 to 2012, insurance funds mainly concentrated in investing in China's Hong Kong stock market, and the investment scale remained at about US$10 billion. Through expansion, insurance institutions hoped to invest in the wider region and with more types of asset classes, in order to achieve the goal of diversifying risks and improving returns. The demand for overseas investment is constantly increasing.
The second stage is a period of steady development. After 2012, with the introduction of foreign exchange policies and changes in the macro environment, overseas investment in insurance funds has entered a period of steady and rapid growth. According to the survey, as of the first half of this year, more than 50 insurance institutions have conducted business in overseas investments, with the balance of investments exceeding US$77 billion, accounting for about 3% of the total assets of the industry in China at the end of last quarter.
In general, the pace of globalization with regards to insurance assets is directly related to changes in the country's overall macro environment and the promotion of regulatory policies.
From the perspective of regulatory policies, the former Insurance Regulatory Commission promulgated the “Administrative Measures for the Overseas Use of Insurance Foreign Exchange Funds” in early 2004, which was revised in 2007 as the “Interim Measures for the Administration of Overseas Investment in Insurance Funds”, truly becoming the regulations governing overseas investment in insurance funds. Detailed rules for the implementation of overseas investment measures were promulgated in 2012, and a notice on the management of overseas investment business was issued in 2015. “One measure, one detailed rule, and one notice” constitute the main regulatory framework of overseas investment in insurance funds.
Nearly US$42 billion in funds may ‘go overseas’
According to the draft of the "Administrative Measures for the Management of Overseas Investment of Insurance Funds", insurance institutions can use their own foreign exchange funds and foreign exchange funds obtained through foreign exchange purchases to make overseas investments. In addition to money market instruments and fixed income products, the investment scope also includes equity products such as stocks and stock funds.
The measures state that total overseas investment by insurance funds should not exceed 15% of the total assets as recorded at the end of the previous year, and the specific investment proportion should be subject to classified management. According to Cao Deyun, Executive Vice President and Secretary General of China Insurance Asset Management Association, as of the end of June 2019, the total assets of the insurance industry reached 19.5 trillion yuan (US$2.77 trillion). Based on a 15% investment ratio, nearly 300 billion yuan (US$42.6 billion) in insurance funds will be therefore available, "going overseas" looking for investment channels. An insurance institution may also authorize a trustee to use financial derivatives such as forwards, swaps, options, and futures for risk hedging management. However, financial derivatives can only be used to avoid investment risks and should not be used for speculation or to magnify transactions.
The Consultation Draft also provides for investment regions. Insurance funds should be invested in mature global capital markets, and the currencies of major countries or regions should be allocated. Their credit rating should be rated A or equivalent by the internationally recognized rating agencies.
The China Insurance Regulatory Commission (CIRC) will also adjust its investment policies, investment ratios, and financial derivative products and other management policies in a timely manner. It will track and monitor the operation of overseas investments in accordance with the client's asset status, solvency, and related party management capabilities in conjunction with changes in international financial markets.
Focusing on the international market is the general trend
The methods to be used in the case of such investments were revised in the "Interim Measures for the Administration of Overseas Use of Insurance Foreign Exchange Funds" issued by the China Insurance Regulatory Commission in August 2004. The old measures and the corresponding detailed implementation rules allow insurance companies to use their own foreign exchange funds to invest in overseas stock markets, but do not involve RMB purchases of foreign exchange investments. At present, the insurance industry's own foreign exchange funds are mainly invested in H-share IPOs, bonds issued by the Chinese government overseas, and US government bonds.
As it will take time for the implementation details of the new measures to be promulgated, there is no accurate timetable for when insurance institutions will formally purchase foreign currencies. However, the China Insurance Regulatory Commission (CIRC) has previously approved more than 10 insurance companies to invest more than US$5 billion in foreign exchange purchase quotas. Since last year, China Insurance, PICC, Taikang and other insurers have obtained special approval to purchase foreign exchange and invest in H shares of Bank of China, ICBC, and China Merchants Bank. These can be regarded as the pioneers of insurance-related QDIIs (qualified domestic institutional investors).
Insiders say that liberalizing the overseas investment of insurance funds is conducive to promoting the insurance industry to participate in international competition on a larger scale, in a broader field, and at a higher level. It encourages insurance institutions to make full use of two resources and two markets, so that insurance institutions can be globally used. Investors can allocate assets within a proper scope, diversify risks, and improve returns.
"At present, the A-share market is encouraging and RMB appreciation is expected to be strong. As a result, many institutions may not have the incentive to purchase foreign exchange investments. However, in the long run, we must pay attention to mature international capital markets, which have advantages such as stable returns and diversified investment varieties,” said one investment professional at a large insurance institution.
After the consultation draft was released, various insurance companies accelerated their preparations for overseas investment research. China Life and Ping An Insurance, which have established investment management companies in Hong Kong, have set up a "bridgehead" for overseas investments in advance, and have successively obtained asset management licenses issued by the Hong Kong Securities Regulatory Commission. The "pawns" of these insurance giants in Hong Kong have not only become a window for their shareholders' foreign investment exchanges, but have also actively carried out third-party asset management services and provided various investment products.