Chinese financial authorities announced a long-anticipated liberalization move Wednesday, allowing qualified insurance companies to invest foreign exchange assets in overseas financial markets.

The provisional rules, jointly promulgated by the China Insurance Regulatory Commission (CIRC) and the central People's Bank of China (PBOC), took effect immediately, and are a major step in broadening the limited investment scope of the domestic insurance industry.

The policy loosening will "help insurance companies broaden their investment scope, improve investment returns and better diversify investments," a CIRC spokesman said.

It will also help Chinese insurers become familiar with international financial markets and boost overseas investors' confidence in the domestic insurance industry, he said.

Three Chinese insurers have launched initial public offerings in overseas markets, which aroused enormous interest from foreign investors.

The move will also help alleviate the upward pressure on the exchange rate of the local currency, or renminbi, the spokesman added.

China has been under pressure to revalue the renminbi, which some say is undervalued. Speculation about a stronger yuan remains unabated in the marketplace this year, prompting growing inflows of foreign currencies that have forced the central bank to increase local money supply so as to enforce a narrow range of the renminbi's exchange rate.

The rapid money supply increases have worried the central bank, which is trying to cool down expansive investment and bank loan growth to lead the nation's economy to a soft landing.

"Allowing insurance companies to invest their assets overseas will create favourable conditions for the central bank's monetary policy operations," the CIRC spokesman said.

Forex-denominated assets by the domestic insurance industry totalled nearly US$8 billion at the end of June, which largely came from equity stakes of foreign insurers, the overseas stock offerings of the three listed domestic insurers, and growing forex-denominated premiums, the CIRC said.

Insurance firms in China have been long frustrated by the narrow investment scope set by regulators. Analysts say that this threatens their repayment capacity as claims peak. They are only allowed to invest in bank deposits, Treasury and selected corporate bonds, and trade stocks through securities investment funds.

With interest rates at a 10-year low and domestic capital markets struggling to recover from a long period of sluggishness, insurance companies' investment yields dipped to 3.14 percent in 2002, close to the 3 percent minimum repayment capacity requirement.

The situation is worse when it comes to the insurers' growing forex holdings, partly because of tight forex controls. The local currency, or renminbi, is still only partly convertible under the capital account, which includes portfolio investment.

Nearly all the forex funds of domestic insurers were held in local bank deposits at the end of last year.

The new rules announced yesterday allow insurers to invest their forex holdings in foreign bank deposits, bonds issued by foreign governments and companies or international financial institutions that have an A-upward credit rating.

They can also purchase Chinese government or corporate bonds issued in overseas markets as well as overseas bank bills, certificates of deposits or other money market instruments with an AAA rating.

To contain risks, the rules require the insurers' total overseas investments to be no more than 80 percent of their forex assets at the end of the previous year.

Eligible insurers must have at least 5 billion yuan (US$600 million) in total assets at the end of the previous year, the rules state, which analysts say virtually exclude the majority of insurers in the local market.

(China Daily August 19, 2004)