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Clampdown on insurers stock buying weighs on market outlook

New restrictions that block insurance companies from issuing products used to help fund leverage buyouts seen as dampening liquidity in the new year

PUBLISHED : Friday, 30 December, 2016, 5:05pm
UPDATED : Friday, 30 December, 2016, 10:16pm

Mainland investors are worried Beijing’s clampdown on insurance funds’ aggressive purchases of shares in Shanghai and Shenzhen will dampen liquidity, putting further pressure on equity markets struggling for direction as the economy slows.

The Shanghai Composite Index has lost nearly 5 per cent since the beginning of December when Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), lambasted insurance firms for highly leveraged takeovers as “barbarians”.

Liu’s criticism, a rare move since he took office in February, was seen as a prelude to strengthened regulation on insurers’ share purchases.

The China Insurance Regulatory Commission (CIRC) stepped in two days later, investigating several insurers and suspending sales of high-risk investment products used to help fund leveraged buyouts.

Efforts by regulators to rein in institutional buying by the mainland’s 15 trillion yuan insurance sector has had a chilling effect on investor sentiment.

Retail investors in China consider the outlook for liquidity as a key factor in investment decisions, as most market turnover is driven by individual investors rather than institutions.

On the Shanghai Stock Exchange, average daily trade in December was down by nearly half from levels in November.

“Liu’s remarks triggered fears of a correction on the market and the 5 per cent loss in the past few weeks fueled the pessimism,” said Ivan Li, a trader at Everbright Securities. “After all, insurance funds are deemed as major institutions to support the market.”

According to the CIRC, insurers invested 1.89 trillion yuan in mutual funds and stocks in November, more than 12 per cent of their total assets.

The value of shares held by insurers accounted for about 4 per cent of the total market capitalisation on the Shanghai and Shenzhen stock exchanges.

The CIRC launched a crackdown on at least six insurers. These included Foresea Life, a unit of Baoneng Group and Evergrande Life, a subsidiary of China Evergrande Group. The units were barred from offering new universal life products – high-yield wealth management products that include a life protection component with most of the funds channelled towards equities, bonds and other investments.

Baoneng and Evergrande are at the centre of a hostile takeover attempt to control China Vanke, the mainland’s largest property developer, listed in Shenzhen.

Insurers’ equity buying have been well received by retail investors in the past, as they believed that the massive funds spent to snap up shares of a targeted company could drive up the share prices, and create opportunities for short-term gains.

Since 2014, more than 150 mainland-listed companies have seen their shareholders issue notices for buying more than 5 per cent of their equity via the secondary market.

Investors are required to publish a statement after their holdings of a listed company exceed 5 per cent, which is considered a message to all other shareholders that a takeover attempt is taking shape.

“The securities regulator has reasons to cast doubts on the insurers’ bids for a controlling stake,” said Liu Qiaoyu, an analyst at Huatai Securities. “Maintaining stability is still the most important task.”

Universal life policies are investment products which are not designed for chasing long-term returns.

CIRC chairman Xiang Junbo said in mid-December that insurers should be financial investors rather than hostile acquirers.

Analysts said that insurance companies still lacked business acumen and the talent pool required to help them effectively manage a listed firm following a takeover.

If insurers were to dump shares as the universal life products expire, a sharp fall would likely take place.

The CSRC chairman was praised by the Communist Party’s mouthpieces for safeguarding investors’ interests.

But retail investors were sceptical.

“As long as insurers’ shares buying is legal, the securities regulator is not supposed to stop them from doing so [trading],” said Li Yan, a Shanghai-based investor who profits from speculating on stocks targeted by insurers. “The crackdown on insurers’ stock investment has a negative psychological impact on investors like me.”

Shanghai’s main share indicator advanced 10 per cent in the October-to-November period, buoyed by upbeat economic forecasts and the lifting of a ban that prevented provincial-level pension pools from investing in the stocks market.

The Shanghai Composite closed below the 3,100-point level on Thursday, having slid 5 per cent for the month, sparking concerns that further declines would signal the onset of a bear market.

A fall below the 3,000-point level would likely spark a further sell-off by retail investors amid concerns that the market had entered a technical downtrend.