Chinese insurers have been given greater freedom to invest overseas in an attempt to expand the scope and diversity of their portfolios.
Liberalisation of the rules will see insurance companies given permission to invest in Hong Kong’s Growth Enterprise Market (GEM) and bonds rated just above ‘junk’ status.
The move comes as insurers’ overseas investments surge, but this has not translated into a substantial uptick in their proportion of foreign holdings.
The China Insurance Regulatory Commission (CIRC), insurers’ watchdog, announced the new regulations on Tuesday. Coming into effect on March 27, the CIRC has amended the overseas investment rules it originally issued in 2012.
Insurers’ Hong Kong investment arms have now been given freedom to invest beyond the city’s market. In the regulator’s original 2012 rules, stringent criteria were laid down for insurers’ foreign mandated managers and their overseas investment arms. Previously if the insurers’ Hong Kong-based subsidiary was unable to meet the criteria, they were only allowed to invest in the city's markets. However, now they do not have to meet any rules and will be allowed to invest globally.
China’s insurers have also been given permission to invest in Hong Kong’s GEM equities market, along with bonds with a credit rating of BBB- and above.
At present, the CIRC lets insurers invest in 25 developed markets and 20 emerging markets globally. Their total overseas allocation is capped at 15% of their portfolio but total emerging market investments are capped at 10%. While they can invest in global equities, their allocations are restricted to main boards only; thus, the GEM board will be new territory.
In all, 208 companies are listed on the Hong Kong GEM board with a combined capitalisation of HK$184 billion ($23.8 billion) as of the end of February. Most GEM-listed companies are small companies in new emerging industries.
“After two years of operation, insurance companies have gained experience in overseas equity investments, so the inclusion of the Hong Kong GEM board will provide insurers with more investment choices,” a CIRC spokesperson said. “Most GEM board companies have business in China, and it also follows the government’s policy in supporting small and micro companies.”
CIRC’s spokesperson said the relaxation of bond credit requirements, from BBB to BBB-, follows international standards. Currently, BBB- is the lowest investment grade on the Standard & Poor’s rating scale.
Under the new rules, the CIRC requires insurers to have at least two professionals responsible for overseas investment risks, while previously only three were required. The relaxation has been made because “most insurance companies’ overseas allocations were made by third-party mandates, which have a high requirement for their investment team,” the CIRC spokesperson said.
Chinese insurers’ overseas investments grew 147% year on year to hit $24 billion at the end of 2014; this figure represented only 1.44% of their total AUM of Rmb10.16 trillion, far below the 15% overseas allocation that CIRC has permitted since 2012.
A CIRC spokesperson said the regulator had adjusted the rules because of renminbi internationalisation and the ‘one belt, one road’ plan, which requires insurers to have more overseas exposure.
‘One belt, one road’ has become China’s new infrastructure development strategy in the region. In Chinese president Xi Jinping’s vision, ties will be built between developing Asian countries through infrastructure spending and trade.