China Pacific Insurance Company’s (CPIC) life insurance unit is looking at multi-asset strategies for its overseas investments but it's been slow-going so far trying to use up its outbound investment quota due to foreign currency risk concerns.

Its experience reflects broader challenges that could yet hold the key to unlocking the global investment potential of Chinese asset owners. 

Having been granted an additional qualified domestic institutional investors (QDII) quota of Rmb1.33 billion ($186 million) in April 2018, increasing its accumulated quota to Rmb1.68 billion as Beijing moved to relax capital controls after a long hiatus, CPIC Life is still working on the execution.

Benjamin Deng

“The main challenge and demand is finding good investment managers,” Benjamin Deng, group chief investment officer of CPIC, told the audience at AsianInvestor’s sixth Institutional Investment Forum China held in Beijing on September 18.

Domestic institutional investors have limited experience in overseas investment and have to rely on third-party managers, so finding the best ones are crucial, he said.

Deng did not disclose how much of CPIC Life’s foreign currency quota has been used up to yet but indicated that the company is still some way short of its new limits. 

The lifer is in the process of finding external investment managers – mainly multi-asset managers. Two selection rounds have so far been completed, he said.

Deng said he paused the selection process a year ago when taking the helm as group CIO because he wanted to see how the currency risks associated with its beefed up overseas investments were going to be hedged.

“Then it turned out that many external managers we were about to entrust our assets were not very clear about methods to hedge the currency risks,” he said.

“From an investor point of view, we can take interest rate risk, credit spread risk, equity risk and liquidity risk, but forex risk is something that I am not willing to bear,” Deng said. “This is mainly because all of the risks in the market, even geopolitical risks, manifest themselves in forex risk, making it particularly hard to track, model and predict.”

FOREX CHALLENGE

The challenge is particularly acute for companies such as CPIC Life because they have huge liabilities principally denominated in renminbi.

The Chinese currency has been depreciating in value against the US dollar since May last year, breaching Rmb7 to the US dollar in August, which would have boosted the renminbi-value of any foreign investment returns earned in that period.

But it can work the other way too, potentially leading to major losses, which is why it's so important to neutralise the forex risk with hedging in order to isolate the underlying investment risks and why CPIC Life is taking its time on the issue.

There will be at least three rounds of selection. Basically, the managers that have been selected are big names in the industry, Deng said, without disclosing any names.

All, presumably, are now working hard on the forex-hedging element of their pitches, enabled by the growth of offshore renminbi trading, not least in the dominant global forex hub of London, where renminbi-dollar trading now accounts for a larger market share than even euro-sterling trading. 

THE BIGGER PICTURE

Resolving the renminbi hedging conundrum could yet help persuade Beijing to open up QDII quotas further and encourage some limited two-way flow of investment capital into and out of China, even if the government's authoritarian nature means some form of capital control will doubtless remain. 

In September, China moved to scrap the quotas on its long-established inbound investment programmes – qualified foreign institutional investors (QFII) and its renminbi equivalent RQFII. Inevitably, that has raised questions over whether QDII quotas will be removed or relaxed soon, particularly when there is rising need for domestic institutional investors to diversify overseas.

The last approval given under the QDII scheme was in April and brought the total quota value to Rmb103.98 billion, according to the State Administration of Foreign Exchange.

Deng said he believed that these investment restrictions will be relaxed again soon, although he didn't say when or by how much.

Capital controls are a restriction on overseas investments, but capital flow is an important driver of economic growth. So the big trend will be a freer flow of capital and there’ll likely be more outbound Chinese investments in the future, he said.

Institutional investors in China will continue to ramp up their overseas investments, Deng predicted, as there is a lot of money in mainland China and there are great investment opportunities overseas.