China's insurance regulator has granted asset management licences to seven domestic fund managers and two securities firms in a landmark move.
These firms will be the first group of non-insurance asset management companies qualified to receive mandates from insurers, notes Shanghai-based consultancy Z-Ben Advisors.
"With the China insurance industry's average investment returns of 3.57% struggling to keep up with inflation, it is not surprising that the CIRC is continuing to push the tempo on regulatory liberalisation," reflects Z-Ben sales director Francois Guilloux in a note.
He points out that the regulator outlined the eligibility requirements for managing insurance assets back in July, in addition to expanding the overall investment scope. "It remains to be seen how large the initial mandates will be, and where the assets will be allocated," says Guilloux.
The seven fund management firms to receive licences are Bosera, Dacheng, Hua An, HFT, Huatai-PineBridge, Harvest and Lion, while Haitong Securities AMC and CICC make up the two brokerage firms.
These all meet CIRC regulations stipulating that to qualify FMCs must have more than three years' operating history in client asset management and no less than Rmb10 billion in client assets, or Rmb5 billion in AUM of collective products.
Asset allocation in China's insurance industry has been conservative, so external management assistance is much needed, notes Z-Ben. Some 50% of investable assets are allocated to low-yield, fixed income products, while 30% are invested in non-performing deposits.
"There has been a snail-like shift towards alternative assets and riskier products in the insurance industry as management inexperience and volatile equity markets have discouraged firms from taking advantage of their expanded investment scope," says Guilloux.
At present there are 17 CIRC approved insurance AMCs that many Chinese insurers have turned to to diversify their portfolios.
But those insurers that do not own an insurance AMC will likely turn to qualified FMCs and brokerages. The caveat is that there is only Rmb400 million in investable assets to share among this group, and not all of that will be directed to third-party managers.
But Z-Ben points to a silver lining, that contrary to popular belief the CIRC did not grant licences exclusively to large managers, with Lion and Huatai-PineBridge two surprise selections.
Lion is a small firm that has seen success in non-traditional products, while Huatai-Pinebridge is both a joint venture and a mid-tier firm.
While neither has ever received an NCSSF mandate or even obtained an enterprise annuities licence, Z-Ben surmises that both received bonus points for their innovative products.
It notes, too, that the next batch of approved managers will likely be announced in the not-too-distant future. "Firms such as ICBC Credit Suisse and CCB Principal will have an advantage in gaining mandates if they are included in the next round," adds Z-Ben.
"However, with smaller FMCs receiving licences, all interested firms should submit an application to CIRC," it concludes.