Financial regulation

China tightens scrutiny on insurers’ offshore financing as crackdown widens

Move is part of ongoing crackdown on risks and foul play in the insurance sector, and broader scrutiny of excessive capital outflows and irrational overseas deals

PUBLISHED : Tuesday, 13 February, 2018, 7:31am
UPDATED : Tuesday, 13 February, 2018, 7:31am

China has tightened its scrutiny on offshore financing for insurers to trim their leverage levels and curb risky overseas investments amid a widening crackdown of the industry.

Insurance companies’ outstanding offshore financing that is backed by domestic guarantees must be capped at 20 per cent of their net assets as of the end of the previous quarter, according to a joint notice from the mainland’s top insurance and foreign exchange regulators posted on Monday.

They must also report any overseas financing backed by domestic assets worth US$50 million or more to the regulators for assessment before the transaction is initiated, according to the notice – dated January 5 – from the China Insurance Regulatory Commission and the State Administration of Foreign Exchange.

Chinese companies commonly use domestic assets as collateral to secure capital overseas. While the practice had supported insurers’ global assets allocations and helped expand their overseas funding channels, it had also triggered problems in liquidity management and a high leverage level – borrowing and refinancing risks, the regulators said.

To avoid misuse, regulators are now limiting the funding to be used only by the insurer’s designated overseas affiliate in which it holds at least a 95 per cent interest in, said the notice. The funds are also banned from investments for arbitrage purposes or for illegal speculative transactions.

Insurers are required to conduct due diligence vigilantly and comply fully with state policies on overseas investments.

China has stepped up its scrutiny on overseas deals since late 2016, following a buying binge by Chinese companies that grabbed global headlines with acquisitions of Hollywood studios, luxury property and sports franchises, triggering fears of excessive capital outflows and depreciation pressure on the yuan. Anbang Insurance Group had been one of the biggest acquirers.

The notice on Monday was part of an ongoing drive to clean up the insurance industry that shows no immediate signs of stopping, analysts said.

“The new notice reflected tighter scrutiny on insurers to guide more structured and rational overseas investments,” said Wesley Cui, general manager of Pacific Life Re in Greater China. “It is also in line with China’s macro policy on foreign capital flows management.”

The new notice reflected tighter scrutiny on insurers to guide more structured and rational overseas investments
Wesley Cui, Pacific Life Re

The notice gave clear guidance on how to use domestic guarantees for overseas funding and shut down on those who want to misuse the channel for risky projects, or any irregularities, Cui noted.

Regulators have been beefing up their crackdown on risks and foul play in the insurance sector, which includes curbing risky universal life insurance products, and risky investments and malpractices in insurer ownership.

The intensified scrutiny has already put a brake on the sizzling premium growth in China. In 2017, total premium income for the insurance sector rose 18 per cent on year to 3.66 trillion yuan (US$571 billion). The growth was down from 27.5 per cent in 2016.