Insurance firms get greenlight on stocks
The China Insurance Regulatory Commission (CIRC) on Sunday gave a greenlight to insurance companies' directly investing in the stock market.
Insurance companies cheered, while the stock market cold-shouldered the move.
"We are glad that we will have a new option in investing our money," said Ong Leanwan, assistant manager of the Shanghai-based Taiping Life Insurance Co.
But stock investors did not react enthusiastically as many had expected.
Analysts said the news had already been digested by the market, so it sparked little buying interest.
All major stock market indices fell Monday. The benchmark Shanghai Composite Index lost 18.2 points to 1,311.15.
CIRC issued provisional rules on insurance institutions investing in stocks Sunday at midnight, allowing companies to immediately begin investing.
The rules say that insurers can invest up to 5 per cent of total assets -- about 50 billion yuan (US$6 billion) at the moment -- in yuan-denominated A shares, convertible bonds and other approved products.
However, at the beginning, insurance companies are not likely to differentiate between direct stock investments and investing through mutual funds.
"If they have decided to set aside 10 per cent of their assets for equity investments, they are likely to stick to that amount instead of making it to 15 per cent just because of the new rules,'' said Taiping Life's Ong.
In a survey conducted by the Shanghai Securities News earlier this year, all the 10 questioned insurance companies said they will be very cautious in their investment approaches.
The stock market has been in a bearish mood over the past months due to weak corporate performances and investors' worries over market expansion.
Insurance companies' direct participation in the market should be good news for stocks.
But "the immediate impact will be very limited,'' said Jin Meiqiao, chief analyst with the Shanghai Greenwoods Asset Management Co.
Compared to capitalization of tradable shares in China's stock market, which total about 1.3 trillion yuan (US$156 billion), insurance companies' investments will be a small amount even if they fully use their allowed direct investment sums in the stock market.
In addition, insurers would need months to prepare risk management and equity research teams before making real inroads in the market.
But the news should be conducive to market sentiment and ought to send the Shanghai Composite Index above the key 1,300 level, analysts said.
Before the promulgation of the rules, Chinese insurance companies were only allowed to invest in banking deposits and bonds and invest no more than 15 per cent of their assets in securities investment funds.
Nearly half of their 1 trillion yuan (US$120 billion) of total assets at the end of May ended up in bank deposits, while only 65.2 billion yuan (US$7.9 billion) was invested in securities investment funds, statistics indicated.
The narrow investment scope has impeded the growth of the country's insurance industry, which expanded by an average 30 per cent during the past two decades, and hampers insurance firms' repayment capacity.
China's life insurance companies face a huge burden of negative-spread policies written in years of high interest rates in early and mid-1990s, making investment yields crucial to their ability to settle claims.
Yet a string of interest rate cuts in the past few years and a lackluster stock market have resulted in declining investment returns.
Chinese insurers' average investment return dipped to 3.14 per cent in 2002 from 4.3 per cent in 2001. The figure for 2003 is not available, but is believed to be lower than the previous year due to weaker market sentiment.
Benjamin Liu, chief operations officer of Taikang Life, said only one channel to invest in stocks through securities investment funds is not enough.
Besides broadened investment channels, direct access to the stock market will also save insurance companies the huge management fees they pay to fund managers.
Insurance companies are charged a minimum 1.8 per cent management fee, which can translate into enormous numbers given their total investment through securities investment funds -- standing at 65.2 billion yuan (US$7.9 billion) at the end of May.