Cash flood seen in insurance reform
Regulatory change may funnel billions of fresh yuan into mainland stock markets
Mainland insurers may soon be able to invest in domestic stocks for the first time, a regulatory reform that could channel billions of yuan into the country's share markets.
Under a draft rule being circulated for consultation by mainland regulators, insurers would be allowed to invest up to 5 per cent of their assets in freely traded and non-tradeable shares of listed companies and convertible bonds.
Buying cheaper non-tradeable shares will appeal to insurers, whose investment options remain restricted, and provide another means for the government to sell its holdings in listed firms, after an attempt to liquidate these on the stock market in 2001 ended disastrously after triggering a steep fall in share prices.
The new direct investment quota would be in addition to the 15 per cent of assets insurers can already invest in mainland mutual funds, a Shanghai-based life insurance company executive close to the talks said yesterday.
Based on industry estimates, up to 50 billion yuan could be funnelled into mainland equities because of the change, the China Securities Journal reported yesterday.
'This would be a welcome move to broaden insurers' investment options,' said Gui Haoming, an analyst at Shanghai-based Shenyin & Wanguo Securities. 'It follows the State Council's recent guidance to channel more insurance assets into the stock market.'
At present, mainland insurers must park most of their assets in low-yield bank deposits, treasury and government agency bonds.
Eight interest-rate cuts since 1996 have eroded investment returns and aggravated the negative spread between the low investment yields and obligations to policy-holders. Many China insurance policies include interest-bearing savings components.
Most insurers have invested less than the maximum permitted in mutual funds. Lobbying for direct stock investment rights, they have argued that China's young mutual fund industry remains too small to accommodate the insurance sector's enormous aggregate assets.
Mainland fund managers have failed to provide a diverse line of products to meet insurers' risk diversification needs, Guotai Junan Securities analyst Liang Jing said.
Mainland insurers also find the often overpriced publicly tradeable shares less appealing.
'We are more interested in legal-person shares and state shares, because the price is cheaper,' the Shanghai insurance executive said.
Non-tradeable shares, traditionally held by the government and government-backed firms, account for 68 per cent of China's five trillion yuan market capitalisation.
They can be transferred off the stock exchanges at deep discounts to freely traded shares, although such transactions are often subject to onerous approval requirements.
No official plan has been announced to convert them into freely traded shares.
