China's foreign exchange and insurance authorities are formulating rules to allow insurance companies to invest forex holdings in international capital markets to boost their returns, a senior forex regulator said Wednesday.

Ma Delun, deputy director of the State Administration of Foreign Exchange (SAFE), said his commission is drafting a regulation on allowing insurers to sell foreign currency-denominated life policies to local residents.

"The State Council has agreed in principle (to allow the insurers to invest in overseas capital markets), and we are going to draft detailed measures for implementation," he told the China Insurance Conference. The conference was organized by the China Insurance Regulatory Commission and supported by the UBS Investment Bank.

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 probably worse when it comes to the insurers' growing forex holdings, which total US$8 billion at present, partly due to 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, Ma said.

Insurance firms welcomed the move. "We have absolutely huge demand for investing overseas," said Xie Yiqun, chairman of the Taiping Life Insurance Co. Ltd., "Part of our registered capital is denominated in foreign currencies."

"Having more choices means the possibility for higher investment returns," he said.

SAFE's Ma said his commission has been loosening forex controls for the past three years, and will continue to do so, although China's huge hidden fiscal debt, a fragile banking system laden with non-performing loans, as well as inadequate macroeconomic management capability make the full convertibility of renminbi a long-term goal only.

"We must be prudent, but that does not mean we won't do anything," he said.

Allowing insurance firms to make international investments will not only increase their investment yield, but will help them improve their competitive edge in the international marketplace, Ma said.

Ma also said his commission is drafting rules on allowing local residents to buy forex-denominated life insurance products, but did not elaborate.

Analysts said that the market has huge potential in China, as Chinese forex holdings are growing rapidly.

Rampant illegal policy sales in recent years by Hong Kong-based insurance companies on the mainland, especially in wealthy regions such as Guangdong Province and Shanghai, have demonstrated the demand for forex insurance policies.

The policies Hong Kong-based insurers illegally sell on the mainland are mostly forex-denominated life insurance products, which typically promise higher returns.

"But with the government's crackdown continuing, and supervision improving gradually, I believe that business will come back (to mainland insurers)," Taiping Life's Xie said.

The mainland authorities have been cracking down on the illegal sales by Hong Kong-based insurers, warning local residents their purchases are not protected by local laws. Mainland insurers are now allowed to sell forex-denominated personal accident policies, but not life products.

(China Daily June 24, 2004)