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29/03/2017

Philippe Benoit

Philippe Benoit

Head of APAC

BNP Paribas Securities Services

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Chinese insurers are in the market for new overseas investment opportunities

In 2012, the China Insurance Regulatory Commission (CIRC) outlined new rules to ease the restrictions on outward investment by Chinese insurance companies and by 2015 the Commission had implemented regulations that extended investment possibilities to bonds, securities, real estate, investment funds and derivatives in 45 non-Chinese markets, from emerging to developed jurisdictions.

In 2016, BNP Paribas surveyed 12 Chinese insurers and conducted interviews with senior executives from the top 20 insurers in China. Results showed that the majority are looking for asset and market-risk diversification and many are enthusiastic about investment opportunities outside their domestic market.

This change also offers significant opportunities for asset managers and global markets.

New opportunity

Reports indicate that, at year-end 2015, 49 Chinese insurers had received authorisation to invest in overseas markets and had foreign investments totalling USD 36.7 billion, an increase of 50% since 2014. Overseas investment has been low, with overall holdings accounting for only 2% of Chinese insurers’ total assets of CNY 12 trillion (USD 1.8 trillion) as of Q4 2015. The CIRC’s 15% overall capital cap still leaves significant room for additional overseas investment. A January 2016 report by Z-Ben Advisors estimated Chinese insurers will invest up to USD 100 billion overseas by 2020 – approximately 2.7 times the amount invested in 2015.

All firms in the BNP Paribas study planned to make overseas investments, with more than 40% intending to do so in 2017. More than 80% will invest more than USD 500 million in foreign assets over the next three years; over 8% will invest more than USD 5 billion.

These insurance firms expect to invest between 1 and 10% of their total assets overseas in the next three years, with half anticipating investing between 5% and 10%, and 40% anticipating investing around 1 to 4%, an increase on the current 2% average. Two factors account for the current low percentage: lack of in-house international investment expertise and the fact that premiums are mostly paid in CNY, creating currency mismatch risk as overseas investments can be vulnerable to foreign exchange fluctuations.

Even though the China Risk Oriented Solvency System (C-ROSS) introduced risk-based capital requirements and closer duration matching for assets and liabilities, appetite for outwards investment is expected to continue. The drivers are decentralisation of domestic market risk, asset diversification and asset liability matching. Moreover, overseas ventures allow access to types of investment that cannot be found in China.

Where china may invest

The resumption of economic growth, the appreciation of the US dollar, excellent market infrastructure and regulations make the North American market highly attractive for Chinese investment. One executive interviewed acknowledged that, while the US market return on net assets was not high, it was undoubtedly the best region for investment when risk adjustment, exchange rates and other factors were taken into consideration.

While some global funds may be reluctant to invest in the US market due to the appreciation of US assets, Europe is emerging from the economic crisis as an alternative investment destination for Chinese insurers. This is due to its undervalued assets, wider range of high-quality asset targets for investment, transparent financial markets and strong legal systems, and unique benefits, such as a degree of harmonisation of regulation of financial services and other industries through European Union membership.

Although the quantitative easing (QE) extension in the Eurozone weakened the Euro exchange rate, financial market conditions and investor confidence are gradually improving in the region, and the Eurozone economy is on a gradual upward trajectory.

Investment opportunities in Asia Pacific (APAC) will also continue to attract Chinese-funded insurers due to the region’s strong GDP growth.

Assets diversification

Since the CIRC’s relaxation of overseas investment restrictions, Chinese insurers have been diversifying their overseas investments, with the overwhelming majority preferring listed securities, private equity, fixed income and real estate. However, there is some interest in other asset classes; one third of insurers surveyed were considering investing in local infrastructure and one fifth said they would consider hedge funds.

With QE depressing returns on fixed-income assets in major economies, Chinese insurers have been investing heavily in real estate projects in developed markets. Sixty per cent of respondents said real estate was their biggest investment, against 40% for fixed income. Thirty per cent have significant stock investments and 10% invested heavily in private equity.

Greater expectations

As they move to new horizons, Chinese insurers expect more from their custodians. Seventy per cent of respondents ranked “local market understanding” as the most important criteria in evaluating a custodian. In the European market, for example, insurers highlighted the need for an experienced, local custodian who understands the region’s financial markets, has extensive relationships with local institutions and regulatory bodies, and is able to react quickly to legal and regulatory changes.

Moreover, custodians must provide Chinese insurance companies with a diverse array of services beyond asset safekeeping, trade settlement and valuation, such as cash management, securities lending, foreign exchange services and financing. Insurers may also wish to work with different divisions of the bank beyond custody, including corporate banking, investment banking and asset management. Commercial real estate has recently attracted significant investment from Chinese insurers, so it is highly beneficial for the custodian’s bank group to be able to provide project recommendations and valuation services, complementing the role of the international real estate agency.

Given time-zone differences, APAC based firms require a 24/7 service and custodians must accommodate close partnerships. Having a local branch close to clients is crucial.

Sixty per cent of the insurers surveyed identified credit rating and responsiveness of staff to specific requests as key in choosing a custodian bank. Balance sheet capital strength is also a core factor. C-ROSS requirements stipulate that Chinese insurers must submit quarterly reports, newsletters, stress-test reports and other documentation. Working with a custodian who can enable this to be done seamlessly is integral to ensuring compliance with C-ROSS.

Massive potential

Overseas investment by Chinese insurers is entering a new phase as firms seek to benefit from a wider base of high-quality assets. Slow economic growth and a challenging interest rate environment in developed markets pose challenges for Chinese insurers, but their wider investment horizons create new opportunities for non-Chinese asset managers and global markets. One thing is certain: overseas investment by Chinese insurers is still far from reaching its full potential.

 

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