Chinese insurers expect to be able to make overseas investments again this year and are eyeing allocations to foreign private equity above all, an investment consultant told AsianInvestor on condition of anonymity.

Mainland insurance firms have been steadily increasing their exposure to offshore alternative assets from a low base, but have been restricted by Beijing’s capital controls in the past year or so, as China Life has pointed out.

Chinese insurers can make overseas investments through the qualified domestic institutional investor (QDII) programme. But they have not been allowed to convert renminbi into US dollars under their QDII quota to make new overseas investments in the past year or so due to the capital controls.

Instead, they have bought Hong Kong shares via the Stock Connect scheme, said the head of international business at a big Chinese insurer-owned asset management firm.

But the China Insurance Regulatory Commission Insurance has communicated to insurers that the QDII freeze would be lifted at some point between September and December, said the Hong Kong-based executive. 

This will have come as welcome news for the industry after a challenging year or so, in which the authorities have clamped down on aggressive investment and selling practices and penalised insurers such as Anbang. 

A resumption of approvals for overseas investments most likely means the CIRC will allow existing QDII quota – which had been frozen – to be used again, rather than handing out new or additional QDII quota, the consultant told AsianInvestor.        

It is not clear how much quota would be re-opened for use, said the consultant, but it is likely be limited. As a result, the executive added, insurers will probably allocate first to private equity funds, as they expect such investments to generate higher returns than public assets or other private-market investments, such as private debt, infrastructure and real estate.  

Moreover, Chinese insurers are most interested in sectors related to their insurance business, such as healthcare, primarily in the US and Europe, the consultant said. 

However, analysts have highlighted the currency risks of foreign investments. “Long-term hedge contracts (e.g. 10 or 15 years) are too costly (or simply not available in the market) until the renminbi becomes fully internationalised,” said Jennifer Law, director of Asia ex-Japan insurance in the equity research department at BOCI Research.

Meanwhile, recognising the rise in demand for private equity, this month the CIRC reportedly issued additional guidelines on PE investment by insurance groups, as they build exposure to the asset class, both as managers of and investors in funds. The aim is to ensure they adopt international best practice in this area.

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