The Chinese regulator plans to make insurers’ asset management products safer investment vehicles for professional and wealthy investors – and that includes how much they can invest in non-standard products, a new consultation paper reveals.
The aim of the Chinese Banking and Insurance Regulatory Commission's (CBIRC) first set of rules on the subject is to better direct insurance funds to serve the real economy and prevent excessive financial risks.
The consultation paper outlined in a release on November 22 explicitly defines such products as private funds that can only be sold to qualified investors – institutions and high-net-worth individuals who can meet predetermined thresholds based on their assets and level of investment experience.
It also broadly classifies the asset management products into three main types: debt investment plans, equity investment plans and balanced products.
Debt and equity investment plans mainly invest in infrastructure projects, including transport, energy and hydraulic facilities. Long-term capital providers like insurance funds can invest into the real economy through such vehicles.
Insurance asset managers have to register with the Insurance Asset Management Association of China in order to launch them, CBIRC said.
Balanced products mainly invest in secondary market assets like stocks and bonds, and insurance asset managers can go through a relatively simpler regulatory process to launch them.
However, any one asset manager should only be able to invest up to 35% of the total net asset value of all of its balanced products in non-standard assets, the consultation paper states.
That should lower the potential risk of these products, as well as lower the potential return, Terrence Wong, senior director of insurance at Fitch Group, told AsianInvestor.
Non-standard assets include a large variety of assets including debt and equity investment plans, trust schemes, asset-backed securities and other types of asset management products.
Another point worth highlighting is that the regulator plans to require asset management arms to set aside 10% of the fee income for setting up a risk-reserve provision, to provide a buffer that can compensate investors when necessary, Wong said.
In addition, the products’ leverage ratio and duration matching will have to comply with the relevant rules, the CBIRC said, without going into detail.
The consultation paper restates the high-level principles enshrined in the unified asset management rules, such as the ban on guaranteed returns and multi-layering of asset management products, Melody Yang, partner at Simmons & Simmons, told AsianInvestor.
China issued unified asset management rules in March last year – an overarching set of rules for different types of asset management products.
By formally expanding the scope of the rules to high-net-worth individual as well as institutions, the private fund industry in China could become even more competitive, she said.
“This seems to be sending a signal to insurance asset managers that they are encouraged to come to the market and compete with their peers, such as private fund managers, subsidiaries of fund management companies, wealth management products of the banks and trusts,” she said.
As of end September, insurance asset management products had an outstanding amount of Rmb2.68 trillion ($380 billion), comprising Rmb1.24 trillion in debt investment plans, Rmb120 billion in equity investment plans and Rmb1.32 trillion in balanced products.
The public community can send their feedback to CBIRC on or before December 27. And as with the unified asset management rules, newly issued products will have to comply immediately with the new rules once they take effect. Existing ones will have a grace period ending in December 2020.