China’s new forex control threatens further blow to Hong Kong’s insurance sector

Hong Kong’s insurance sector is likely to come under increased pressure after Beijing tightened its scrutiny of individual foreign currency purchases at the start of the new year in a bid to further restrict capital outflows, analysts say.

The city’s insurance companies were already feeling the pinch from a raft of earlier measures designed to make it harder for mainlanders to purchase insurance products as a way of hedging against the declining yuan.

As of January 1, 2017, individuals are required to explain the purpose of their foreign currency purchases at Chinese banks and provide additional information, according to a recent announcement by the State Administration of Foreign Exchange (SAFE), the country’s top currency regulator.

Specifically, individuals are restricted from using foreign currencies in overseas investments, including property, securities, life insurance products and investment-related insurance purchases.

Analysts expect Hong Kong’s insurance industry to feel the effects of the latest measures.

“We expect more material impact on the business Chinese tourists bring to Hong Kong insurers, given the fresh restrictions on outbound personal investments,” said Jenny Jiang, an equity analyst for Morgan Stanley.

“The new rules for 2017 not only make US dollars less accessible to individuals but also effectively prevent customers from using the onshore banking system to pay for cross-border insurance premiums.”

According to the rules, the annual cap of US$50,000 for each person seeking to sell yuan remains unchanged.

However, the process has become more restrictive and complicated, said analysts.

“Although there are still other ways of making the insurance payment, this move could dampen interest in and demand for Hong Kong insurance policies to a certain extent, as customers may see the

transaction as too risky and too complicated, ” Jiang said.

In addition, it could make renewal payment more difficult and lead to surrenders in extreme cases, she said.

Analysts from Credit Suisse said the latest measures were “a clear reaction” to the yuan’s recent weakness and the government’s mounting concern about capital outflows.

Insurance stocks hammered as China tries to slow capital outflows through Hong Kong insurance purchases

In particular, the authorities are worried that there will be a rush to buy foreign currencies in the early months of 2017, as Chinese people try to use their US$50,000 quota for the year before the yuan weakens further or additional tightening measures are introduced.

“There will be some sectors which could face a more fundamental impact on their business under this new measure, most notably insurance companies that rely heavily on business from mainland customers as well as Macau gaming operations,” they said.

The Credit Suisse analysts expect the government to introduce more capital controls.

“Indeed, the current measure is only a relative measure, as the level of the individual quota has not been removed. Therefore, if the RMB continues to weaken, whether this measure will be really effective in containing capital outflow remains doubtful. In this case, one should not be surprised if more capital account control measures follow,” they said.

Share prices of Hong Kong-based insurers have been under pressure since last year, as China gradually tightened capital controls to stabilise the yuan.

Mainland investors have poured into Hong Kong’s insurance sector in recent years as they try to skirt strict capital controls to move money offshore.

In October, the Chinese authorities banned UnionPay cardholders from buying investment-related insurance products in Hong Kong and launched a probe into illegal sales of overseas insurance policies on the mainland.

AIA Group, the largest life insurer in the city, has slid 20 per cent from its peak in October. It fell 0.5 per cent to close at HK$43.55 on Wednesday.

“The uncertainty facing the Chinese tourist business has been a key overhang on AIA’s share price since last year as China gradually tightens capital controls to stabilize its currency,” Jiang said.

Nonetheless, she said the policy risk has been “largely reflected” in AIA’s current share price and the company’s fundamentals still look attractive.

Jiang still put an “overweight” rating on the stock, but cited downside risks such as potential regulatory changes, particularly in relation to capital and consumer protection.