How Chinese insurers could see an alts product revival

Far fewer alternative investment products, especially private equity investment plans, have been issued by the Chinese insurance industry so far this year as tighter regulations bite.

But the hiatus is unlikely to last, say some industry experts, given Beijing's desire to mobilise insurance savings to help support the faltering Chinese economy.

Most big insurers in China have asset management subsidiaries and the alternative investment products issued by the latter are heavily subscribed by their parent companies. These products invest in private equity (equity investment plans) or infrastructure and real estate loans (debt investment plans).

Their supply has shrunk this year due to the government's efforts to leech excess debt out of the Chinese economy by clamping down on risky and opaque lending practices and instilling more order in the country's financial system. 

According to data from the Insurance Asset Management Association of China (IAMAC), 140 investment plans worth Rmb275.4 billion ($39.68 billion) were registered in the first 10 months of 2018. This is 28% down on the same period last year.

However, since the Chinese government wants to direct more insurance funds to support the real economy and has moved to relax rules in some areas, insurers’ asset management arms are now expected to release more alternative investment plans next year.

Insurer hunger for these products certainly seems intact.

Insurers have a huge demand for them; demand has always been strong, one investment researcher at a Beijing-based insurer told AsianInvestor on condition of anonymity. Supply dropped because of the deleveraging efforts and regulatory restrictions but that trend could be reversed as the government responds to the slowing economy, the analyst said.

“I think there will be more of these products," he said.

Zhu Qian, a senior credit officer at Moody’s Investors Service, said the slump seen in insurers' alternative investment plans was the result of tighter rules imposed in April following the publication of new unified rules on asset management products.

Both these equity and debt investment plans will, nonetheless, continue to feed Chinese insurer appetite for higher yield, she told AsianInvestor. 

THE PLUNGE

The new asset management rules in April sought to reduce the country's systemic financial risks and to curb shadow banking. But they were relaxed in July as China's economic uncertainties grew in the midst of its US trade war, to enable a smoother transition.

Source: IAMAC (click for full view)

Equity investment plans shrunk the most in relative terms in the first 10 months of 2018, dropping to Rmb5.5 billion from Rmb48.85 billion in the same period of 2017 (see chart). 

In a consultation paper published in October, the China Banking and Insurance Regulatory Commission (CBIRC) said it was looking to ease restrictions on insurers’ private equity investments. To help prop up slowing Chinese economic growth, the regulator has proposed to increase the cap on insurer investments in single private equity funds to 30% from 20% currently.

“The issuance of equity investment plans has been depressed since the ban on 'fake equity, real debt' structures," Zhu added, referencing loans, often made to risky but well-connected borrowers within the shadow banking system, that masqueraded as equity investments but were more like debt due to the repurchasing agreements attached to them. 

In January, the China Insurance Regulatory Commission released new rules designed to stop the asset-management arms of insurance companies from making such 'fake equity, real debt' investments or other similar loan-like equity investments in unlisted corporates.

But under the latest set of proposals, insurers could be re-incentivised to look at new forms of private equity investment. 

"The new policy direction provides more flexibility in terms of equity investment, so we may see some new equity-investment-plan structures,” Zhu said.

Equity investment plans can take different forms, including stock-pledged lending. They will emerge in structures different from 'fake equity, real debt' after the new proposed rules, she said.

INFRA HOT SPOT

For infrastructure debt investment plans, product registration has been moderate for most of the year but it suddenly shot up in August to more than double its monthly rate earlier in the year (see chart).

Source: IAMAC (click for full view)

The strong number coincided with the Ministry of Finance's decree that local governments issue more than Rmb1 trillion of special-purpose bonds by October-end. While most of the local government bonds are bought by commercial banks, insurance companies invested in them through debt investment plans too.

The State Council also announced a directive aimed at boosting the delivery of new infrastructure with a series of policy recommendations in late October.

“The new policy direction continues to encourage insurance investment to support the development of the real economy. Therefore, the issuance of infrastructure debt investment plans is quite strong and will continue to be the hot spot in the insurers’ alternative investment space,” Zhu said.

IAMAC declined to comment when approached by AsianInvestor for their views on the outlook for new product registrations.