Beijing’s market plan: add insurers, build local investors

In an attempt to drum up more institutional investment into its financial markets, China's government is trying to entice more international insurers to invest directly. It has also set up local institutional investors, in an effort to promote market stability and reduce the infamously wild swings of its equity market.

Curbing excessive volatility is likely to prove a key step to ensuring more investor participation in China's markets over the long term. This year has proven a case in point; after rising by 6.6% during 2017, the Shanghai Composite Index has dropped 19.3% from January 1 to August 17, largely over fears of a mounting trade dispute between China and the US.   

For life insurers, however, China remains an appealing long term bet, given the relative underpenetration of the market and its potential. Several international insurers are set to establish onshore presence, following Beijing’s announcement in November 2017 that it would loosen the rules around foreign players in its insurance industry. Steps include allowing foreign insurers to establish wholly-owned local units, and raising the foreign ownership cap on local players to 51% from June. 

Offshore insurers are looking to build there. Hong Kong-based FWD and Germany’s Allianz have made initial steps to establish wholly-owned life insurance units in China.

Anil Wadhwani, Manulife’s Asia chief executive, told AsianInvestor the Canadian insurer is open to doing so as well. UK insurer Prudential is also prioritising China as part of its regional expansion plans, according to regional chief executive Nic Nicandrou.

As these market entrants gain money from policy holders, they will need to invest into local markets. Generali China Life, the local insurance arm of an international player, invests its liabilities mostly onshore. Yezdi Chinoy, Generali’s chief investment officer for Asia, said his company focuses mostly on local bonds, but it could buy equities too.

“If you ask me will I go into equities, potentially yes, but that’s based on the constraints of the portfolio,” he said. Generali China Life has an asset management subsidiary in China. 

The desire of Chinese authorities to encourage more institutional investor participation also drove market development. Large foreign institutional investors will bring in their own set of order and discipline, Chinoy said.

STATE-OWNED PLAYERS

In addition to trying to lure more foreign investors to participate, Beijing is also inventing its own cadre of local asset owners, to help smoot its notoriously volatile markets.  

Several large domestic government organisations have emerged as big A-share buyers in the past few years, and have been dubbed ‘the national team’ by Chinese investors and include institutions like Central Huijin and China Securities Finance Corporation (CSFC), UBS said in a report in May. 

These funds appear to trade against market trends in order to reduce market volatility, UBS said. Since the mid-2015 sell-off, these funds are estimated to have increased their stock holdings by an estimated Rmb1 trillion ($157.8 billion). 

For all their firepower, the funds cannot completely counteract market sentiment. Rising tensions over trade between the US and China led the Shanghai Stock Exchange Composite Index to drop about 8.5% in the year to June 14, on the back of these fears.

Howard Wang, head of greater China at JP Morgan Asset Management believes volatility should subside in coming years. 

“I was a local country head of Taiwan in 2002 to 2005, when it was included in MSCI, and back then it was retail investor dominated,” he said, by way of example. “It has become much more institutionalised and now trades in a very institutional way ... [and now] foreign investors hold one quarter of it. China could offer similar themes.” 

Meanwhile, Janet Li, wealth business leader for Asia at Mercer, notes A-share volatility should be viewed from a global perspective. “We know volatility is scary but when you look at the correlation [of A-shares] to Asia and key asset classes like Japan, and Europe it has a low correlation, so risk-adjusted returns are not bad,” she said. “From a portfolio perspective there is a risk mitigation effect.”

For all the challenges of investing directly into China, the country’s economy is projected to become the world’s biggest before 2030. And its local market will weigh up in stock indexes. Investors will have to plan for that.

Some, such as insurers, may decide direct entry makes sense, particularly as the country adds its own institutional investors to the mix.

This story is the last in a series focused upon the likely growth of international investment into China's markets, which were adapted from the cover story of AsianInvestor's June/July 2018 magazine. Please click here and here for the previous two stories.