Chinese insurers new source of shadow banking loans to developers

The mainland's cash-rich insurers are quickly becoming a new source of funding for developers, despite financial regulators' efforts to stem the flow of risky shadow banking loans into the struggling real estate sector.

The China Insurance Regulatory Commission, the industry's watchdog, said earlier this month it would take measures to curb soaring fund flows from insurance firms to trust schemes that act as a channel for off-balance-sheet lending at banks.

Such funds from insurers amounted to 280.5 billion yuan (HK$354.5 billion) at the end of June, with nearly a third eventually being invested in the property industry.

The regulator said the risk was under control for now as the amount accounted for only 3 per cent of insurers' total assets, but the pace of the increase - up 94.5 per cent by the end of June compared with the end of last year - was worrisome.

The concerns aired by the CIRC follow tightened regulatory scrutiny of banks' off-balance-sheet lending, which has fuelled expansion in the once-sizzling property sector and boosted local governments' investment in infrastructure.

Strategists at Bank of America Merrill Lynch called insurers the "new kid in town" in a shadow banking monitor report published earlier this month, saying that certain kinds of policies issued by mainland insurers - known as union-link policies - will fast emerge as another important channel for banks' off-balance-sheet business, despite the insurance regulator's rules against such practice.

"Based on past experience, we expect insurers to quickly become a major channel in the shadow banking sector," strategists David Cui, Tracy Tian and Katherine Tai said in a report. "The current convoluted regulatory framework is not effective in controlling risks when managing the financial deregulation."

The CIRC liberalised rules in 2012, letting insurers invest in the property market, but not the residential sector.

As part of its continued efforts to improve insurers' investment returns, the CIRC earlier this month allowed them to use premiums from union-link policies to invest in financial products that eventually end up in property and infrastructure projects. Union-link policies provide holders not only insurance but also investment returns from the money they put with insurers.

China has imposed strict rules for bank loans to developers. For example, loans from banks have to go directly to third-party suppliers and cannot be used to pay land premiums.

To meet strong funding demand from developers, commercial lenders have often pushed their loans off the balance sheets, channelling clients' money to developers via trust firms and, more recently, through securities houses and fund management companies, too.

Tang Jun, chief executive of Beijing Capital Land, told the South China Morning Post earlier this year that "insurance funds cost slightly higher but their use is more flexible and the maturity is often longer".

Global ratings agency Standard & Poor's estimated that the Chinese insurance sector's exposure to shadow banking, excluding corporate bonds, increased to about 13.3 per cent of the sector's total invested assets at the end of June, up from 10.8 per cent at the end of last year.

It expects the absolute amount to increase 30 to 40 per cent over the next 12 to 18 months to 1.5 trillion yuan to 1.6 trillion yuan, the agency said in a report last month.

Meanwhile, due to the regulatory crackdown and rising competition from new channels, fund flows from trust schemes to the property sector more than halved from a year earlier to 15.8 billion yuan in September, with the average cost largely unchanged at 9.4 per cent.