China to use insurers to close the funding gap in Silk Road projects

Procedures will be simplified for insurers to fund major projects that comply with the Belt & Road Initiative, in a move to mobilise the insurance premium that surged by a third to US$232 billion in the first quarter.

PUBLISHED : Monday, 22 May, 2017, 4:29pm
UPDATED : Monday, 22 May, 2017, 10:53pm

Chinese insurers, some of whom just had their wings clipped after a boom in wealth management products went awry, are being mobilised to pour the world’s biggest pool of premium income to help close a potential funding gap in the government’s multibillion yuan infrastructure buildup along the old Silk Road.

Starting immediately, procedures will be simplified for insurers to fund major infrastructure projects that comply with the blue print of the Belt & Road Initiative, as President Xi Jinping’s vision of infrastructure-led trade is called, according to a statement by the China Insurance Regulatory Commission.

The latest move may help close the US$26 trillion funding gap that the Asian Development Bank said is required by 2030 for infrastructure projects in Asia. Insurance premiums grew by almost a third in China to 1.6 trillion yuan (US$232 billion) in the first quarter, according to CIRC data.

Any debt investment plan in water conservancy, energy, transportation, hi-tech and advanced manufacturing from AAA-rated projects financiers can be exempted from additional collateral or third-party guarantee, an incentive which simplifies the investment procedures and makes such investments more effective, CIRC said.

The regulator will also designate special priority channels for insurers to register debt investment plans in countries and regions along the old Silk Road, CIRC said.

“The authorities are sending a clear signal for insurance to back the real economy, by offering lower thresholds in investments in major infrastructure,” said Hong Jinping, an insurance analyst at Hua Chuang Securities.

Still, the strongest motivation for insurers is still the ability for their investments to earn returns that surpass bank deposit rates, an imperative which may be uncertain with infrastructure projects that carry long payback periods, especially those in underdeveloped countries or regions, she said.

“Insurers may be more propelled by foreseeable higher returns or preferential tax policies, rather than lower threshold,” she said.

Insurers will still be very keen on the returns and risks exposure when investing in nations alongside the trade initiative, except for a limited number of signature projects, she added.

China’s insurance industry had gone through a rapid cycle of boom and bust, since the former regulator Xiang Junbo opened the flood gates to allow companies to sell high-yielding investment products with guaranteed returns.

In order to meet the guarantees to policyholders, some insurers redirected their funds toward corporate raids, takeovers and equity investments.

The resulting furore led to several insurers being reprimanded and fined, while Xiang was ultimately fired last month, pending an investigation into possible misconduct.