Chinese insurers are being encouraged to use their long-term funds to increase their exposure to listed companies, particularly through equities, as concerns grow over the possible adverse market effects if the US-led trade war erupts again.

Insurance companies should use funding to invest in the shares and bonds of quality listed companies and examine how to enhance their asset-liability management systems for this very purpose, the China Banking and Insurance Regulatory Commission (CBIRC) said on Monday.

The regulator said it planned to speed up the regulatory process for approving significant equity investments made by insurance funds. It also indicated that it will relax its rules to boost the number of special-purpose investment products issued by insurer-owned asset management firms and widen their scope to make it easier for them to invest in listed companies.  

The official line is that the changes will enable insurers to better fulfil their role as institutional investors, to maintain the stable and healthy development of the Chinese stock market and corporate sector.

But analysts were quick to note the broader context.

For Iris Pang, Greater China economist at ING Bank, the move is to counter the potential market sell-off that could follow after the 90-day trade truce between the US and China elapses.

Iris Pang, ING Bank

“It is because of the uncertainty of the trade war,”  she told AsianInvestor. “If there is no satisfying result in March, the A-share market will easily fall. So they are now encouraging the insurers to invest more in the A-share market. It is very clear.”

Whether they succeed in that or not is no given, though, the chief investment officer of a Shanghai-based joint-venture insurer, warned.

"Whether insurers will increase their investments will mainly depend on their confidence in the future market trend," he told AsianInvestor. 

The trade war had been escalating since March 2018, when the US implemented a worldwide 25% tariff on steel imports and a 10% tariff on aluminium imports. This triggered a raft of retaliatory tariffs on US exports.

But in early December, a 90-day truce was announced by the US and China at the G20 summit to allow for bilateral talks, effectively removing the threat of stinging tariff increases on January 1.

Trouble is, the issue could now come back to the fore with a vengeance, given the lack of progress in US-China trade talks since then and the potential extradition of Huawei’s chief financial officer Meng Wanzhou from Canada to the US on criminal charges.

And with sentiment still weak on Chinese equities due to nagging global growth concerns, as well as the rumbling trade dispute, investors have been holding out for more proactive government measures to support the market, Elaine Zhou, equity analyst with the chief investment office UBS Global Wealth Management, told AsianInvestor in November.

SPECIAL-PURPOSE PRODUCTS

There are now 10 insurance asset managers with registered special-purpose products, worth a potential total of Rmb116 billion ($17.23 billion). Of these, five products have already been launched with about Rmb2.2 billion invested so far, CBIRC said separately on January 25. 

The CBIRC first announced new rules for the setting up of these special-purpose products in October last year, which will hold stocks, bonds and convertible bonds issued by listed companies. The investors targeted by these vehicles comprise insurance companies, pension funds and other institutional investors.

The aim is to lift market confidence and provide long-term funding support for listed companies, in part by relieving any liquidity risks when their shares are used as collateral, according to the October announcement.

That's because when companies pledge their shares as collateral to borrow money from financial institutions, the collateral tends to be worth less if there is little trade in the stocks, Pang of ING Bank said. “When the special-purpose products invest into the listed shares, it will reduce such liquidity risks,” she said. 

For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.