China to Allow Insurers to Invest in Private Equity and Real Estate

By and | September 7, 2010

China will allow insurers to broaden their investment channels into private equity and real estate, a long-awaited move that could unleash as much as $100 billion worth of fresh funding into unlisted firms and the property sector.

Chinese insurers are allowed to invest up to 5 percent of their total assets in private equity and related financial products and 10 percent in real estate, according to rules published on the website of the China Insurance Regulatory Commission (CSRC) over the weekend.

A broader investment pipeline for China’s 4.5 trillion Yuan ($661 billion) insurance industry could boost long-term investment returns for insurers including China Life and Ping An, benefit cash-strapped private companies, and enable private equity firms such as TPG, and the Carlyle Group to raise money more easily in China.

But the short-term impact on insurers’ earnings and share prices will be limited, as the new investments will be subject to close regulatory scrutiny, while the capital markets have been expecting the rule changes for years, analysts said.

“It’s certainly good news for the insurance sector, and may push up insurers’ long-term investment returns by 50 basis points to 5 percent annually,” said Tong Chengdong, analyst at Guosen Securities Co in Shenzhen.

“But I don’t expect to see any big changes overnight, as it takes time to find good projects and the real estate sector is still subject to government curbs. Besides, the rule changes have long been priced into insurers’ share prices.”

The CIRC said last month that insurance firms would be allowed to invest in private equity and real estate, without publishing detailed rules. Ping An and China Life have already invested in infrastructure projects directly in a pilot scheme.

Ping An shares fell more than 1 percent in Hong Kong in early trading on Monday, while China Life rose more than 1 percent in a broader market that was also up more than 1 percent.

INVESTMENT CAP
Under the new rules, insurance companies are allowed to invest in unlisted financial firms as well as insurance-related businesses including pension, medical and auto services.

The rules cap insurers’ indirect private equity investments, often through funds, at 4 percent of total assets, and bar them from investing in venture capital funds.

In real estate, insurers are prohibited from investing in residential properties, and must not directly participate in real estate development. Investments in property-related financial products are capped at 3 percent of assets.

“The rules would enable insurers to better match their assets and liabilities, improve asset allocation, ease investment pressure, diversify risks, and protect asset safety as well as the interests of policy-holders,” the CIRC said in the statement.

China’s insurance assets totaled 4.5 trillion Yuan at the end of the second quarter, meaning insurers may invest as much as 450 billion Yuan [$66.17 billion] into real estate and 220 billion Yuan [$32.35 billion] into private equity, the official Shanghai Securities News reported on Monday.

The new rules may help the real estate sector, which is suffering from sluggish sales and funding shortages as Beijing curbs speculation and investment to avoid a property bubble.
Global private equity firms such as TPG, Carlyle and the Blackstone Group, which are racing to launch Yuan-denominated funds in China, should also benefit.

TPG last month launched two funds in China and said it was targeting Chinese insurers as potential investors. ($1=6.80 Yuan) (Editing by Dhara Ranasinghe)

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