Overseas investment cap tripled for insurers

PUBLISHED : Thursday, 26 July, 2007, 12:00am
UPDATED : Thursday, 26 July, 2007, 12:00am

Mainland insurers received a boost yesterday after getting approval from watchdogs to invest up to 15 per cent of their assets in overseas equities and derivative products, allowing them to seek higher returns on outbound markets.

The China Insurance Regulatory Commission, along with the central bank and foreign exchange regulator, published rules yesterday that the investment cap on insurers' overseas investment will be raised from 5 per cent while insurance firms with combined assets of 2.53 trillion yuan will also be able to diversify their exposure in higher-return equities rather than fixed-income products only.

The rules took effect immediately.

In 2005, the regulator started a trial programme which allowed some insurance companies to use their own foreign currencies to invest in overseas bonds.

The government's announcement was in line with economists' forecasts of a 15 per cent quota for the qualified domestic institutional investor scheme, under which insurers are allowed to exchange a certain amount of yuan into foreign exchange and invest abroad.

The deregulation is aimed to 'give insurers flexibility in allocating their assets, improve their performance, and ward off risks of the yuan's appreciation', the CIRC said.

Mainland insurance firms earlier this month received approval to double their purchases in the domestic A-share market to 10 per cent of their total assets.

The insurers recorded returns worth 137.4 billion yuan in the first half, up 260 per cent year on year thanks to a buoyant domestic stock market, the regulator said on Tuesday.

The insurance firms almost used up their increased investment quota on A shares, hoping to ride a further rally to strike it rich, according to the commission.

The new rules would usher 380 billion yuan of funds into the overseas stock market with Hong Kong being the primary destination initially, investment banks said.

'Obviously going offshore allows them to both diversify their exposure but also to invest in higher-return instruments,' said Stephen Green, senior economist with Standard Chartered Bank.

'However, it also makes them vulnerable to exchange rate movements which they will have to learn more to hedge.'

The regulators said insurance companies should use derivative products to hedge risks rather than speculation. 'The derivative products should be utilised to hedge against risks,' the statement said. 'The deregulation also asked a question to the insurers on how to enhance management.'

Jing Ulrich, JP Morgan's China equities chairman, said: 'The new rules will facilitate the conversion of yuan-denominated assets for overseas investment and provide insurers with an avenue to reduce risks.'

The mainland hoped to direct funds out of the country to ease inflationary pressures as consumer prices jumped 4.4 per cent on soaring food prices last month, well above the government's 3 per cent target for this year.