MNI EXCLUSIVE: China Insurers Wary Of Push For Stock Buys

China must accelerate reform of stock market rules on disclosure and corporate oversight if its attempts to boost equity purchases by the country's cash-rich insurance companies are to be successful, sources at state-owned companies and policy advisors told MNI.

Regulators in July raised the cap on equity holdings for insurance companies with solvency ratios of over 350% to 45% of total assets from the previous limit of 30%, and the China Banking and Insurance Regulatory Commission chairman Guo Shuqing used a recent Xinhua interview to urge insurers to direct more of their CNY20 trillion in investments to shares. But the industry's response has been lukewarm. Few insurers have fully utilised their quotas, with most having kept equity holdings to 10-15% of assets in recent years, said a senior official with a state-owned insurance company.

"Insurance companies are super conservative," the official said, noting that it is difficult it is for them to buy anything other than blue chips, even if instructed to do so by regulators.

Insurers have to balance investments with long-term liabilities and new mark-to-market accounting requirements expose them to potential losses if stocks fall in value, adding to their caution, sources noted. Insurers are also concerned by deficiencies in stock market regulation, which sources said encouraged fraud and accounting malpractice.

Under current rules, loss-making companies can be barred from making initial public offerings, or even delisted. These act as an incentive for companies to falsify their accounts, sources complained.

Insurance companies will only boost equity investments when corporate oversight improves, said Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology, adding that a corporate "sense of integrity and legal awareness must be in place."

Chinese authorities have promised to overhaul stock market regulation to reduce malpractice, but progress has been slow. A 2013 commitment to enhance disclosure requirements for initial public offerings has so far only been enacted at the relatively small ChiNext market, a subsidiary of the Shenzen Stock Exchange focussing on high-growth firms, and that only took place in August.

BOND SHORTAGE

Almost a third of insurance companies' holdings were composed of bonds at the end of the first half, almost all of them government-backed. The senior insurance source said companies would be keen for the government to directly sell more long-term bonds, given that much official sector debt, such as borrowing by local government finance vehicles, was no longer seen as safe as Beijing cracks down on regional borrowing. Local governments were banned from guaranteeing debt issued by financing vehicles, classified as corporate bonds, in 2010.

In 2019, China sold CNY46.3 billion in 30- and 50-year bonds, about 12% of total issuance of CNY3.8 trillion.

In addition to bonds and listed equities, insurers hold about 15% of their assets as bank deposits, and 10% are equities in non-public companies. About a third of their assets are classified as "others", which often in practice means shadow banking, sources said. Insurers' purchases of listed equities are restricted to companies with solvency ratios of over 350%.

China's insurance industry is highly concentrated, with the top six companies accounting for almost half of the sector's total assets.