Chinese insurers new source of shadow banking loans to developers
Regulator takes action as fund flows to the shadow banking sector reach 280b yuan at end of June, with a third invested in property industry
The mainland's cash-rich insurers are quickly becoming a new source of funding for developers, despite financial regulators' efforts to stem the flow of risky shadow banking loans into the struggling real estate sector.
The China Insurance Regulatory Commission, the industry's watchdog, said earlier this month it would take measures to curb soaring fund flows from insurance firms to trust schemes that act as a channel for off-balance-sheet lending at banks.
Such funds from insurers amounted to 280.5 billion yuan (HK$354.5 billion) at the end of June, with nearly a third eventually being invested in the property industry.
The regulator said the risk was under control for now as the amount accounted for only 3 per cent of insurers' total assets, but the pace of the increase - up 94.5 per cent by the end of June compared with the end of last year - was worrisome.
The concerns aired by the CIRC follow tightened regulatory scrutiny of banks' off-balance-sheet lending, which has fuelled expansion in the once-sizzling property sector and boosted local governments' investment in infrastructure.
Strategists at Bank of America Merrill Lynch called insurers the "new kid in town" in a shadow banking monitor report published earlier this month, saying that certain kinds of policies issued by mainland insurers - known as union-link policies - will fast emerge as another important channel for banks' off-balance-sheet business, despite the insurance regulator's rules against such practice.
"Based on past experience, we expect insurers to quickly become a major channel in the shadow banking sector," strategists David Cui, Tracy Tian and Katherine Tai said in a report. "The current convoluted regulatory framework is not effective in controlling risks when managing the financial deregulation."