Beijing plans to boost the number of international insurance companies in Hong Kong that are allowed to invest in the mainland's stock and bond markets, as part of broader initiatives to expand those markets through the qualified foreign institutional investor (QFII) scheme.
The upshot will be to increase the number of yuan-denominated insurance policies offered in Hong Kong, allowing the insurers to develop a new line of business, while also fostering wider global use of the Chinese currency.
Most of the 8 million life insurance policies written in the city are now denominated in US or Hong Kong dollars because insurers can freely invest the premiums from those policies in bonds, stocks or properties denominated in those two currencies. Insurers don't usually offer yuan-based policies because they haven't been able to invest in mainland markets. But some Hong Kong insurers have issued yuan-denominated policies to investors keen to bet on the appreciation of the yuan after Beijing encouraged wider use of the currency to settle trade and for selected investments from 2009.
Chan Ka-keung, Secretary for Financial Services and the Treasury, the official in charge of developing Hong Kong as an offshore yuan trading centre, declined to discuss any potential new measures yesterday. But insurance industry sources say an announcement of the initiatives could coincide with an expected visit by President Hu Jintao to mark the 15th anniversary of the handover of Hong Kong to Chinese rule on July 1.
The QFII scheme was launched in 2002. It enables licensed foreign investors such as international banks and pension funds to use US dollars and other currencies to buy yuan-denominated shares and bonds, subject to a foreign-exchange quota. A similar scheme denominated in yuan, called R-QFII, was introduced in December and also operates under a quota system but does not involve foreign-exchange risk.
Only a few international insurers operating in Hong Kong take part in the QFII scheme, and no insurer is yet part of the R-QFII programme. An insurance executive said this would change soon as Beijing was expected to grant more insurers access to both schemes. 'Such relaxation would be important for the local insurance companies to invest in the mainland share and bond markets so as to enable them to issue yuan-denominated insurance policies in Hong Kong,' the executive said.
Beijing is also expected to announce soon that it will lower some entry barriers for investors such as global fund managers and pension funds to attract more participants in the QFII scheme. An executive of another insurer said that over the past few months the industry had lobbied mainland regulators to further open the foreign investment schemes, receiving positive feedback.
In April, the China Securities Regulatory Commission said it would dramatically boost the QFII scheme by US$50 billion to a total of US$80 billion, while the R-QFII scheme was increased by 50 billion yuan (HK$61.20 billion) to 70 billion yuan. Various participants in the schemes are then allocated individual quotas.
Hong Kong insurance sector legislator Chan Kin-por said that if Beijing allowed more insurers in Hong Kong to take part 'it would boost the development of yuan insurance in Hong Kong and strengthen the city as an offshore yuan trading centre'.
But it could be a tough sell on the insurance front. Investor interest in yuan products has declined, with many analysts predicting the currency will remain flat for the foreseeable future.
Reflecting the lack of investor appetite, yuan deposits in the city have dipped for five consecutive months to about 552.4 billion yuan at the end of April, the latest figures available, down 12 per cent from November.
Still, Michael Huddart, chief executive of insurer Manulife (International), which was granted a QFII quota in 2010, hopes to get a further allocation. 'We are very optimistic as to the outlook for China and will continue to invest aggressively to grow these operations significantly,' Huddart said.
The number of life insurance policies written in Hong Kong
- Most of the policies are in Hong Kong or US dollars