Insurance firms in China have received approval to invest their foreign exchange holdings in overseas debt markets, in what could be the first step towards China allowing financial institutions to invest in offshore stocks.

The rules, which allow insurance companies in China to invest up to 80 percent of their foreign currency holdings in offshore markets, will be ad hoc, as financial authorities are considering approving the much-anticipated qualified domestic institutional investor (QDII) scheme, experts said.

The latest move, which took effect last Wednesday, will ensure insurers, including China Life Insurance Co and Ping An Insurance, can chase higher returns and better meet their huge, long-term obligations, experts said.

The move will also reduce pressure on China to revalue its currency, the renminbi, and will help the country balance its foreign exchange reserves, a China Insurance Regulatory Commission (CIRC) spokesman said.

CIRC and the People's Bank of China (PBOC), the nation's central bank, last week promulgated the rules, which grant companies the right to invest in overseas government and corporate debts, certificates of deposits and other fixed-income products.

"It will help insurance companies broaden their investments, improve investment returns and better diversify investments," the CIRC spokesman said.

Insurance companies in China, given the country's dismantling of the cradle-to-grave welfare system, have grown rapidly in recent years, and virtually transformed themselves into financial giants, even by international standards, experts said.

Chinese insurers, which hold more than 1.08 trillion yuan (US$131.7 billion) in assets, have gained only limited access to China's stock markets and other financial markets that feature higher returns, experts said.

About 519.3 billion yuan (US$63.3 billion) of Chinese insurers' combined assets were invested in negotiated bank deposits, or 53.37 percent of the total by the end of June.

Meanwhile, 69.19 billion yuan (US$8.42 billion), or 7.11 percent of the assets, were invested in securities and funds.

"Chinese insurers, with their premium incomes growing rapidly, are eager to find ways to achieve better returns, and to better match their assets with liabilities," said Bai Wei, an insurance expert with the Beijing Insurance Industry Association.

With interest rates at 10-year lows 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-per-cent minimum repayment capacity requirement.

Global ratings agency Moody's, among others, identified Chinese insurers' limited investment options as a key problem, noting it hampered their ability to meet long-term obligations.

"Insurers have lobbied hard for the right to diversify their investments, by including higher-return assets and assets from overseas financial markets," Bai said.

China's financial authorities have come to realize widening insurers' access to international markets might be the ultimate way to boost the firms' earnings, and to prevent any failures in meeting policy obligations, Bai said.

Insurers in China must improve their investment skills in building portfolios, and in dealing with foreign exchange risks, which are outside their experience, experts said.

China Life Insurance Co, the country's largest life insurer, recently launched its asset-management subsidiary to increase its investment performance.

China Life controls nearly half of the nation's life insurance sector.

CIRC Chairman Wu Dingfu said, early last month, "allowing insurance companies to invest in stocks or in offshore financial markets is the main route regulators are taking.

"That will benefit both insurers and the country's nascent insurance industry."

Insurance firms in China last year earned a combined 388 billion yuan (US$46.89 billion) in income. That was triple the figures recorded four years ago.

China's insurance industry posted 237.35 billion yuan (US$28.9 billion) in insurance premium revenues in the first half of this year, up 10.81 percent year-on-year.

Some experts, however, were disappointed that insurers were barred from investing in stock markets that offer higher yields. They had expected China's regulators would approve the QDII scheme.

China's US$16-billion social security fund received approval in March to invest in overseas markets.

Chinese investors are not allowed to invest in foreign markets, a situation that has frustrated holders of large amounts of foreign currency, such as insurance companies.

Insurance firms in China had US$9.775 billion in foreign currency assets by the end of June this year.

"The provisional rules, although a tentative move towards QDII, clearly signal the Chinese Government is set to lift some restrictions on its capital account," Bai said.

The move will help foreign exchange regulators reduce the domestic supply of dollars and ease upward pressure on the renminbi, she said.

(Business Weekly August 26, 2004)