Caution still reigns for Chinese insurers when it comes to offshore investments – as is shown by the fact that 82% of their Rmb93.5 billion ($15.3 billion) in foreign allocations are in Hong Kong dollar-denominated assets, according to data from the China Insurance Regulatory Commission (CIRC) cited by local media.
Interestingly, Hong Kong equities account for 59% of the HK dollar exposure, revealed the CIRC at an event organised by the Insurance Association of China last week, in what was reportedly the first disclosure of such data. The regulator had not posted the figures on its website and did not respond to requests for comment or confirmation.
Chinese insurance firms’ total overseas assets rose 10% to Rmb93.5 billion in the year to the end of September, according to the CIRC data. But that figure still represents only 1% of their total AUM of Rmb9.5 trillion as at the end of August, far below the permitted 15% overseas allocation.
Indeed, some have yet to put any money at all into foreign assets, although some have pointed out the challenges in doing so, such as Larry Wan, chief investment officer of Zhongrong Life.
Hence these institutions are not yet moving significantly into globally diversified portfolios, despite encouragement from the regulator.
Chen Wenhui, vice-chairman of the CIRC, was quoted by Shanghai Securities Times as saying that mainland insurers should have global allocations because of their asset expansion and their need for risk diversification and higher investment returns.
Some firms have already gained exposure in overseas markets, he added, but their allocation is still very small and further global allocation will be the trend.
China’s insurance industry will accumulate more than Rmb20 trillion worth of premiums by 2020, Chen forecast, and this capital will require a more stable return source such as a global allocation can provide.
However, mainland firms’ lack of global investment expertise and their high return expectations, among other things, are obstacles to increasing foreign allocations.
Chinese insurers look for an annual return of at least 8-10% from overseas investment in dollar terms, because the typical yield from onshore assets is around 5% and renminbi appreciation contributes another 3% annually, said Chen Dong, chief executive at Hong Kong-based China Life Franklin Asset Management.
They tend to invest in two asset classes – first equity, then property, he told AsianInvestor. “Equities are risky but provide higher returns, and most exposure is to Hong Kong equities today.”
This is hardly surprising, perhaps, given that their international investment arms tend to be based in Hong Kong and may not have capability in markets outside the city.
Moreover, the message from the regulator on foreign allocations is somewhat mixed, which won’t help matters. While on the one hand encouraging mainland insurers to diversify their portfolios globally, CIRC's Chen was also quoted as warning them not to rush into overseas exposure.
He stressed the need to learn from experience and highlighted challenges such as the uncertainties of the global economic recovery, high volatility in financial markets and geopolitics. He suggested that insurers have to build an experienced talent pool, improve their research on global markets and develop a robust risk-control capability.