China’s growing wealthy middle class population are increasingly looking to safeguard their assets and plan for the future by investing in long term insurance and saving products in Hong Kong, but strict financial controls in the mainland are limiting opportunities. The products, including critical illness insurance as well as life insurance, are often denominated in US dollar and have grown in popularity in China, with premiums collected from mainland Chinese visitors making up 30 per cent of Hong Kong’s annual total for personal insurance in 2018, almost double the level in 2015, according to figures from Hong Kong Insurance Authority. But with Beijing only allowing an individual a US$50,000 foreign exchange quota limit per year, and with the state-backed UnionPay banning Chinese citizens from using the debit card to buy insurance investment products in Hong Kong in October 2016, total premiums have dropped. The premiums collected from mainland visitors in 2017 plunged 30 per cent to HK$50.8 billion (US$6.5 billion) from HK$72.7 billion (US$9.3 billion) in 2016 after customers sought to move their money ahead of the ban, with the level described as “abnormal” by two separate insurance agents. In 2018, the total premiums fell further to HK$47.6 billion (US$6.1 billion). Due to the limit imposed on foreign exchange, with any purchase beyond that requiring special approval from the exchange regulator, individuals often have to make multiple trips to Hong Kong to meet yearly premium requirement. "[In terms of product target], from an underwriting risk perspective, given mainland Chinese visitors have to travel to Hong Kong to buy insurance policies, this indicates they are in general in a healthy situation, "said Kenneth Dai, president of Actuarial Society of Hong Kong. Lan Tianyi, a Beijing-based consultant in China’s aerospace industry, is among the growing middle class population seeking protection for future uncertainty and better investment returns with China in the middle of the trade war with the United States and its slowest rate of economic growth in more than three decades. He has already bought a critical illness policy, but is now considering buying a US dollar savings product offered by Hong Kong-based insurance companies because returns on investments in mainland China are “too low”. “I started considering buying insurance in Hong Kong back in 2016, following the birth of my child,” said Lan. “The critical illness policy is for [protecting] my family. I have health insurance already back home. So whether the returns can be moved back to the mainland is not important because I have got it covered. Another reason [for buying policy in Hong Kong] is that in case my child wishes to study abroad when she grows up.” China’s stock market has rebounded from its lows of last year despite a weak yuan outlook, but Beijing has handed down the toughest set of measures to control the growth of the real estate market, traditionally the most popular asset among the mainland middle class. Investment in denominated foreign currencies, such as the US dollar, is another alternative asset but China’s notorious strict foreign exchange control makes it difficult for individuals searching for more exposure. China has maintained a tight grip on cross border money flow not just to ensure financial stability, but also social and political stability. In 2015, the outflow was so large following an aggressive anti-corruption campaign and devaluation of the yuan that China’s central bank had to spend more than US$1 trillion of its foreign exchange reserves to defend the exchange rate. In the following year, Chinese authorities took further action to control outflow through the buying of insurance policies in Hong Kong as UnionPay implemented its bans and the insurance regulator also issued a notice warning mainland investors about the risk of buying insurance in Hong Kong. “By then, some mainland Chinese were trying to transfer assets rather than really buy insurance products, which triggered a bandwagon effect among the rich, that’s why there was a growth in products that required a bigger premium. The market has since returned to calmness and it hasn’t been as crazy in the past two years,” said Chris Liu, an agent at Prudential Hong Kong. The market has since returned to calmness and it hasn’t been as crazy in the past two years. Chris Liu, Prudential Mainland regulators are concerned over the outflow of capital after the yuan lost 10 per cent against the US dollar last year and the stock market fell to its lowest level since 2008's global financial crisis. Investment and consumption confidence was also weakened as the private sector, the engine of China’s economic growth, struggled to obtain financing. Bank of China Hong Kong, the only bank that did allow mainland Chinese citizens to set up an account for premium renewals, changed its requirement last year and it now requires a deposit of HK$200,000 (US$25,500) to set up an account. “It is getting more and more difficult to cash US dollars in some mainland cities. Even though the cap is US$50,000 per year, a client told me that he could only cash US$1,000 in his hometown,” Liu added. We want you: Chinese cities step up efforts to lure domestic migrants Private entrepreneurs in China, in particular, are nervous about their future, forcing President Xi Jinping to reassure the business community last year that the government would protect their personal and property rights. Most Chinese entrepreneurs still do not separate company assets from their private assets, meaning if there are problems with their company, their personal wealth may also be frozen by authorities. To hedge against these risks, their spouse or partner would often sign up for the policies, according to insurance agents. Why is ‘the fruit not yet ripe’ in the US-China trade war? Multiple agents from Prudential and AIA confirmed that the most popular product bought by middle and upper class mainland investors, including entrepreneurs, are long-term saving plans which gives the insured death and accidental death cover with a yearly premium that could be in the millions of US dollars. It is getting more and more difficult to cash US dollars in some mainland cities. Even though the cap is US$50,000 per year, a client told me that he could only cash US$1,000 in his hometown. Chris Liu, Prudential “There are 600 agents in our team, our premiums increased by 70 per cent last year. We still have clients who paid for policies that required an annual premium over US$1 million or even US$2 million,” said one agent who did not want to be named. Liu’s team at Prudential, which includes 16 agents focusing on mainland Chinese clients, saw a premium increase of 300 per cent in 2018 despite slowing growth in individual business from mainland Chinese customers overall. Returns from the insurance policies could be around 3 to 4 per cent on average, comparable to returns on higher rated bonds, making them a relatively safe choice for investors whose primary objective is to preserve their wealth, according to David Leung Kwan-yu, executive director at Centaline Securities. “A lot of times insurance companies would invest the premium in the bond market. Of course, their returns won’t be as good as equities in the long term,” he said. China has pledged to open up its financial market to offer the general public more investment options, although the progress has been slow. In February, the State Council announced plans to promote cross border transactions of financial products including insurance within the “Greater Bay Area” in Guangdong. The plans could provide regulatory certainty to both foreign insurers and the insured, however, no timetable has been announced. “The Chinese domestic insurance market is improving as well, which will absorb demand for middle and low end insurance. In the long term, Hong Kong is still more competitive in middle and high end insurance products,” Liu said.