China's regulators are coming, it seems. Less clear is whether the country's insurers will follow.
In a press briefing last week, representatives of the Chinese Banking and Insurance Regulatory Commission (CBIRC) intimated that oversight of the Chinese financial system will likely be stepped up in the coming months after a trade-war hiatus.
But they also telegraphed just how much Beijing wants more insurer money to flow into shares – and it's here where they could find it tougher to get their own way, industry insiders say.
A spokesman indicated last week that the CBIRC is studying whether to increase the regulatory limit on insurers’ equity assets.
His remarks came after news emerged in May that China regulators may raise this limit to 40% from the current 30% to enable insurance funds to allocate more to listed stocks and ensure industry moves to invest more in private equity don't cannibalise public equity allocations.
Equity investments (both listed and unlisted) now account for 22.64% of the Rmb17.02 trillion ($2.48 trillion) investment assets of insurance companies as of May this year. Insurance fund investments in Chinese A-shares account for 3.1% of the stock market by value – the second-highest after mutual funds.
“This is just a policy gesture, signalling ‘we [the regulators] encourage you to do so’,” the chief investment officer of one Shanghai-based domestic insurer told AsianInvestor.
At present, Chinese insurer equity allocations are well below 30%. So even if the regulatory limit is raised beyond that, insurers will only continue to make investments logically, according to the market conditions, he said.
“Raising the limit at this time does not have much practical meaning in the near term … it’s just symbolic,” Xia Le, Hong Kong-based chief economist for Asia at BBVA, told AsianInvestor.
Regulators want long-term funds from institutional investors like insurers to go into the stock market. However, the market risks are high given ongoing trade tensions, rising valuations and wavering economic growth. Institutional investors want to make money from their investments and regulators cannot force them to allocate their assets in a certain way, Xia said.
After all, regulators have been encouraging insurers to invest more in stocks since the beginning of the year due to concerns rising over the possible adverse impact of the US-China trade tensions.
In the script documenting the press briefing's Q&A session, the unnamed spokesman also signalled a revitalised regulatory clampdown on malpractice after a seemingly quiet first half of the year.
Regulators have also recently started insurer inspections, which will continue through the rest of the year. The inspections focus on corporate governance, solvency and how insurers use their funds, among other things, he said.
Chinese regulatory efforts appeared largely to ease off when the Sino-US trade war kicked off last year, with the rules less rigorously enforced, Xia said. But people have now grown accustomed to the trade tensions and accepted that they are probably here to stay. The collapse of Boashang Bank has also been a wake-up call for regulators, Xia said.
“People have a feeling that this trade war will be something long-term. So things that should be done have to be done and not [delayed] until the trade war is over,” he said.
In mid-June, Beijing seized control of collapsed Inner Mongolia-based Baoshang Bank as it posed serious credit risks, raising investor concerns about the risks that may be facing other Chinese small and medium-sized banks and the rest of the country’s financial system.
A second CBIRC spokesman at the same press briefing said the immediate risks had been resolved and that the market was now "very stable" due to the remedial measures taken.
Still, by signalling that it is ready to up the regulatory ante and to act more pre-emptively, it would appear that the CBIRC isn't prepared to take any chances – which is good thing.