Another door has been opened for China's insurance companies.

They have been given the green light from the China Insurance Regulatory Commission (CIRC), the industry watchdog, to invest their foreign exchange on stock markets overseas.

Wu Dingfu, president of the CIRC, confirmed the news at an industry conference in mid-July.

A notice appeared on the CIRC's website in mid-June saying that the State Council was opening the door for foreign exchanges in the insurance industry to invest in stock markets abroad. This notice was withdrawn hours later, however, as "a supporting detailed regulation needed to be added".

The notice said that the total amount foreign exchange that could be invested in overseas markets should be under 10 per cent of the investment quota set by the State Administration of Foreign Exchange (SAFE). Investment in a single stock was to be no more than five per cent of the total release of that stock.

"The CIRC took risk controls into account and set 10 per cent as the conservative cap," says Wang Guojun, an insurance professor at the University of International Business and Economics.

"The limit is necessary given the investment capabilities of insurance companies."

China's insurance industry boasted foreign exchange valued at US$9.78 billion by late-June. This mainly came from the capitalization of joint ventures, foreign-funded insurance companies and the raised capital from three listed insurance companies. Only approximately US$6 billion, however, can go directly to investments.

Three listed insurance companies China Life Insurance Co, PICC Property and Casualty Co and Ping An Insurance Co will be the main players. Ping An has been approved, but the others are waiting for the go-ahead from the CIRC.

Ping An has a foreign exchange investment quota of US$1.75 billion, says a report by Dai Zuxiang, an analyst at Guotai Jun'an Securities (Hong Kong). That implies that US$175 million can be put into overseas stock markets. The quotas of China Life and PICC Property and Casualty stand at US$2.42 billion and US$580 million respectively, meaning US$242 million and US$58 million is available for investment.

Foreign exchange is still limited, however, in what they can invest.

"This is a breakthrough, though, and it will help to add value to insurance assets," says Zhang Le, an analyst at Taikang Life Insurance Co.

"We are eager to have a crack, and we can after the CIRC release the detailed supporting regulations."

H-shares, especially red chips, will be the primary choice for investment, insiders say.

"Insurance companies are more familiar with them and find it easier to make investments," says Wang.

"The comparatively low valuation of H-shares also make them safer."

Overseas investments also have no influence on the domestic stock market, according to Zeng Yujin, an official at the CIRC.

"Because the yuan cannot be exchanged into foreign currencies under the capital account, there shouldn't be any concern that capital would be withdrawn from the domestic stock market," Zeng adds.

Wang says the only influence would be psychological.

This new investment channel is still not enough to ease insurance companies' thirst for a range of investment options, experts say.

Insurance companies have long complained about limited channels for investment and soaring premiums. Prior to the CIRC notice, almost all the foreign exchanges of insurance companies were at banks, with a few of them invested in foreign treasury bonds.

The return on investment for insurance capital is fairly low. Some analysts estimate that the proceeds have dropped below three per cent. This is the bottom line set out in regulations on insurance companies' solvency quotas and supervisory indexes.

The potential risks of insurance capital management are also increasing.

Deposits, bonds and repurchases account for nearly 90 per cent of an insurance company's investment portfolio. These investments are subject to interest rate fluctuations and monetary policy. Limited investment channels mean most insurance capital is put into only a few products. Once the market becomes unfavourable, the principal and proceeds cannot be guaranteed.

Statistics show that 503.9 billion yuan (US$62.2 billion) of insurance capital was poured into the bond market in 2004, accounting for 44.8 per cent. Total industry assets topped 1352.9 billion yuan (US$167 billion) up to this May, up 14.1 per cent from earlier in the year.

"We know that putting all your eggs in one basket is not good," one observer says.

"But choices are limited, because the stock market and fund management companies are weak. The bond market is comparatively better."

Overseas investments can help reduce systematic risks.

"The economic difference between countries is much lower than among different industries within a country," Wang says.

"Investment returns will not suffer big losses when an industry or the economy of one country deteriorates."

He adds that efficient foreign investments must include a restriction scheme and incentive system.

"With higher returns come more risks, and these schemes are particularly important in ensuring safe investments."

Sun Qixiang, a senior economist at Peking University, says insurance companies may face a bigger challenge after investment channels are expanded.

"They should design a proper investment portfolio based on the performance of the bond and stock markets. They should also consider their debt structure and products."

(China Daily 08/29/2005 page4)