Chinese insurers look set to increase their allocations to private equity to support the real economy, spurred on by Beijing, but some analysts question whether that is necessarily in their best interests.
In a consultation paper published last week, the China Banking and Insurance Regulatory Commission (CBIRC) said it planned to lower the risk charge for private equity investments in industries supported by the government, as well as in infrastructure projects and debt-for-equity swaps.
It didn't give a precise time frame for the change but said specific policies would follow in due course and that it would also allow insurers to invest in a broader range of industries than just financial services.
One chief investment officer that AsianInvestor spoke to at a Shanghai-based joint-venture insurer said the insurance industry would respond positively once the new rules were in place by allocating more funds into private equity.
However, Eunice Tan, a senior director for insurance ratings at S&P Global, was more cautious.
“Private equity does not provide a matching mechanism to the long-term liabilities of insurers. In fact, we view [that] these instruments expose insurers to higher market risks”, Tan told AsianInvestor.
Information flow is less timely versus that of publicly traded stocks. Consequently, it would mean more work for the insurers to ascertain the true valuation of these private equity investments, she said.
The relative opaqueness of the investments also reduces liquidity. Although the liquidity demands on life insurers are less intense than on non-life insurers, those pressures are still there, Tan added.
In a separate statement, the CBIRC said the proposed new rules would provide insurers with more investment choices as well as a fresh channel of long-term funding for private companies. Their investments, it said, would also help lower the country's dependence on debt finance, in keeping with the government's deleveraging campaign, and increase the resilience of economic growth over the medium-to-long-term.
China's economy grew by 6.5% in the third quarter, the weakest year-on-year pace since the first quarter of 2009, as the country's trade war with the US intensified. Deleveraging efforts, though reportedly toned down now, were also seen to slow the economy due to the reduced stimulus from credit expansion.
At present, insurers can only invest in other insurers and financial institutions for significant equity investments. Insurance-related businesses such as pension and healthcare providers and motor services are also allowed.
But under the proposed new rules, insurers will be allowed to invest in the equity of private companies across most industries except for those on a "negative list". This will very much widen the scope of companies that insurance funds can invest in.
Insurers can select the industries and corporates for investments based on their own solvencies, risk appetites, investment budgets and asset-liability management, CBIRC said.
The industries on the negative list were not specified in the announcement but Tan made an educated guess.
“Some industries remain restricted in the list, such as overcapacity industries, industries causing heavy pollution, industries that do not follow government initiatives. We believe such restrictions aim to support [the] stability of insurance companies’ investment portfolios,” she explained.
Other relaxations in private equity investments are also proposed in the consultation paper.
At present, investments into equities of non-listed companies and private equity funds are restricted to 5% of an insurer’s total assets, but there is no mention of this in the proposed new rules, noted Kunlun Asset Management in a report on Monday.
Insurer investments into a single private equity fund is capped at 20% of the fund's scale, but it will be lifted to 30%, according to Kunlun AM.
At present, insurers have to have made a profit in the previous accounting year and they should have net assets of at least Rmb1 billion ($144 million) to be eligible to invest directly in private equity. If the proposed new rules come into effect, though, there will be no requirement on insurers’ profitability and only Rmb100 million in net assets will be needed.
Market participants can respond to the CBIRC's consultation paper by November 26.