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Regulation

‘You shouldn’t be acting like a hedge fund’, insurance regulator warns Evergrande

China’s insurance regulator urges Evergrande to avoid speculation in stocks, focus on principles of long-term value investment

PUBLISHED : Tuesday, 08 November, 2016, 8:33pm
UPDATED : Tuesday, 08 November, 2016, 10:58pm

China’s insurance regulator has issued an unusual warning for China Evergande Group to stop making use of its insurance unit as a slush fund for trading assets.

The China Insurance Regulatory Commission (CIRC) has summoned Evergrande Life Insurance, the life insurer under the Evergrande Group, and has “explicitly expressed its unsupportive stance” about its speculative, short-term trading of stocks, according to a statement on the regulator’s website.

“Evergrande Life should have a thorough introspection of the negative influence brought by its short-term speculation of stocks, and should stick to the principal of long-term value investment and strengthen risk control,” the statement said, adding the CIRC would tighten up scrutiny into the use of capital by insurers.

Insurance capital is usually considered a long-term investment, just like pension funds, or social welfare funds
financial columnist Guo Shiliang

Evergrande, one of the most indebted developers in China’s property industry with a net gearing ratio of about 430 per cent at the end of June, is the parent company of Evergrande Life, holding a 50 per cent stake.

The regulator is clamping down on speculation by insurance companies on China’s domestic stock markets, after insurers were seen to be manipulating share prices. Analysts noted that active trading on high volume is permitted under the current law.

“Insurance capital is usually considered a long-term investment, just like pension funds, or social welfare funds. But in the last two years, insurance have changed their investment style and more frequently engage in short-term speculation in stocks, some have even become a weather vane followed by smaller investors in the stock market,” said Guo Shiliang, a syndicated financial columnist who appears in the official China Securities Journal.

“The CIRC has given a verbal warning to insurers by admonishing Evergrande Life, however, whether Evergrande is manipulating share prices, there has yet to be a ruling from the securities authority,” Guo said.

Insurance companies are allowed to invest up to 30 per cent of their total assets in equity markets, according to the CIRC.

However, as insurance companies expand their underwriting business by aggressively issuing universal life insurance products, many are raising their investment risk profiles in an attempt to realise higher returns, said Su Peike, chief researcher at the University of International Business and Economics’ Public Policy Research Center in Beijing.

“Evergrande Life did not break rules, but it is suspected to have manipulated share prices,” he said.

Universal life insurance products for investment and life insurance purposes, offer guaranteed minimum rates of return for buyers, and most of them are of short duration and allow investors to surrender without charging penalties.

On October 26, Shanghai-listed company Guangdong Meiyan Jixiang Hydropower Co Ltd announced

Evergrande Life Insurance had become its largest shareholder, holding a 4.95 per cent stake.

On November 1, an inquiry letter issued by the Shanghai Stock Exchange revealed Evergrande Life had sold itsholdings in Meiyan Jixiang on October 31, unwinding a position accumulated in three successive trading days from September 28.

Shares of Meiyan Jixiang closed at 7.32 yuan on October 30, up from 4.9 yuan on September 27.

The share price closed at 6.51 yuan on Tuesday, having fallen sharply after news of Evergrande’s exit become public.

Evergrande Life recorded net losses after tax of about 334 million yuan in 2015 yuan and 48.2 million yuan in 2014.

“The company has yet to prove its ability to turn around its operations....Although Evergrande has stated its large-scale property business will help promote its new insurance business and achieve strategic synergies, Moody’s expects it will take time for the strategic value of the investments to materialize,” Moody’s said in a report in April.