ICBC-Axa is set to lower its allocations to non-standard debt due to the rising credit risks, bucking the trend seen elsewhere in the Chinese insurance industry as demand for longer-dated debt grows and broadens out.

With regulators cracking down on insurer sales of short-term and high-risk wealth management products, or so-called universal life products, liability durations are becoming longer, forcing insurers to match them with longer-dated assets, Guo Jinlu, chief investment officer of ICBC-Axa, explained at AsianInvestor’s 5th China Global Investment Forum in Beijing in September.

Guo Jinlu

But rather than turning to long-dated debt alternatives like infrastructure debt, the Shanghai-based joint venture between Industrial and Commercial Bank of China and Axa plans to lengthen bond durations with high-grade corporate bonds, he said.

That's because bond yields are becoming more attractive but also because credit risk has been rising in China as the government tries to squeeze out excessive leverage from the economy, making it harder for borrowers to refinance their debt with new loans.

“The risk in non-standard debts in infrastructure is mainly credit risk…our allocations [in such assets] will go down,” Guo said.

In China, non-standard debt typically refers to debts that are not traded on securities exchanges. They included trust loans, bankers’ acceptance bills, letters of credit and, in particular, debt investment plans issued by insurers’ asset management arms, as the parent insurers invest a lot in those products.

A rising number of debt investment plans is a strong indicator that Chinese insurers are investing more in such assets. And in the first seven months of the year, there were 40 infrastructure debt investment plans worth Rmb92.64 billion ($13.45 billion) registered with the Insurance Asset Management Association of China, a 14% increase on the same period last year.

Major local players such as China Life and Ping An have also said that they plan to lengthen asset duration and potentially earn higher yields by raising their exposure to alternative debts.

OVERSEAS ALLOCATION

In addition, Guo said at the forum that ICBC-Axa is looking to invest overseas for the first time, although there are certain markets that the insurer will avoid. 

It wants to buy assets that cannot be found in the domestic market, for instance overseas private equity funds, Guo said, adding that these could be a "buy" next year.

ICBC-Axa’s assets under management total about Rmb100 billion are all invested in the domestic market, with more than 80% of them invested in fixed-income assets, both standard and non-standard, with the rest in equities, AsianInvestor understands.

Fixed income assets are mainly managed internally while most of the equity assets are managed externally, according to an investment staff member at the insurer who declined to be named.

The coming five years will be a difficult time for Chinese investors. Financial risks will be exposed as China's economy slows down and this will have repercussions for other economies, Guo said.

“As China’s gradually switches away from an investment-led economy, I think we need to be very careful about those markets that rely highly on the China market, especially those that export raw materials to China, like Australia,” he said.

“These countries that relied upon China’s economic growth and reaped a lot of benefits will be most miserable,” he said.

Guo also gave his thoughts on the domestic equity market.

Although ICBC-Axa does not plan big changes to its allocation, it has revised down the expected return from A-shares and is structurally changing the stocks it invests in.

As a result, Guo said, the insurer will invest more in the consumption, pharmaceutical, health, education, elderly care and emerging industry sectors.