Recent amendments to the Chinese insurance law have not only painted a bright picture for investment funds, but have also nudged Chinese law firms into keeping an eye out for more insurance mandates. Effective from 1 October 2009, the revised Insurance Law strengthens regulatory supervisions and provides more rights for the insured. But the bright spot of the revised law that has the greatest potential to boost the economic standing of China is the clause to expand the investment channels of insurance companies.
In contrast to previous stringent restrictions which only allow investments in government bonds and financial bills, insurance funds can now make investments in stocks, securities-investment funds and “immovable assets” – real estate and infrastructure. Although it was said in March 2009 that detailed regulations of the investment into “immovable assets” would be announced on 1 October, this is yet to be released.
The limitations of the previous law resulted in large amounts of insurance funds remaining uninvested. The latest statistics released from the China Insurance Regulatory Commission (CIRC) state that the total capital of China’s insurance industry is approximately US$518bn to March 2009. US$325bn of that was available for investments, and at the end of January, 84% of the total amount invested was attributed to bank deposits and bonds.
Intended to maximise the value of insurance funds as well as bring additional liquidity to the securities and assets market, the revised law has significantly expanded investment options for insurance companies. As the amount of funds available for investments continues to increase, insurers who want to diversify their investments and achieve higher returns are moving forward with the new rules.
From April 2009, the corporate bonds category has been expanded to include domestically issued mid-term notes (MTNs), and other debt financing instruments issued by non-financial enterprises. The amendments also stipulate that insurance companies no longer need to obtain pre-approval from CIRC to make direct investments into the share market.
The scope of debt investment into infrastructure projects has also been expanded under the new law. Life insurers and non-life insurers can now invest 6% and 4% of their assets in bonds backed by infrastructure projects respectively..JPG)
Despite the economy’s excitement over the investment pipeline of insurance funds, lawyers in China seem unsurprised. “The revised law confirms the direction in which insurance companies are moving,” says Stuart Valentine, a partner in Mallesons’ China practice. “Life insurance is a long-term business and investments in real estate are very natural. One of the reasons why the Chinese government took so long to implement this is because the real estate market was overheated over the past few years. So the government has been limiting investment in real estate. They were waiting for the sector to cool, so this implementation can help boost this sector,” he explains.
Anticipating enthusiasm from insurance clients, King & Wood partner Wang Jianzhao talks about applications made by clients even before the amendments have been enforced. “Many of our long-term clients have already approached us regarding their suppressed interests in investment channels,” he says. “Even real estate sector clients have contacted us in the hope that investment from insurance companies can help resolve their financial problems. What clients don’t understand is that the specific regulations have not been released yet – and these special regulations that are tied to insurance companies make such transactions very complex.”
Valentine says that an influx in interest is also inevitable. “Insurance companies who are operating in China are desperate to invest, because what was available to them previously was very limited.” Chinese regulators are confident that the changes will support reform and development of the country’s capital markets, and enhance the ability of insurance companies’ self-asset allocation and investment management.
The changes are also boosting the bottom lines of insurers such as China Life Insurance, the world’s top life insurer by market value, and rivals Ping An Insurance and China Pacific Insurance.
Bank on insurance
In September 2006 the CIRC issued the “Notification for Insurance Entity to Invest in the Equity Stake of the Bank”. The policy allows insurance companies to have an equity stake in non-listed banks, with recent deals made in accordance with the Notification. China’s largest insurance company, China Life Insurance invested into Guangdong Development Bank, and Ping An Insurance also merged with Shenzhen Development Bank earlier this year. Ping An engaged DLA Piper and DeHeng Law Offices to be its international and PRC counsel respectively on the deal.
As part of the transaction, it also acquired a 16.7% stake in the issued shares of SDB from Newbridge Capital, a private equity fund under the former Texas Pacific Group, SDB’s largest shareholder. The insurance group established a financial platform to invest in private equity, property and infrastructure in light of these changes.
The platform includes Ping An Trust, Ping An Asset Management, Ping An Securities and Shenzhen Ping An Innovation Capital Investment Company, which will focus on investing in banks and financial assets.
The latest legal amendments have inserted a new clause whereby banks are allowed to invest in insurance companies. As a result, this saw China Great Wall Asset Management’s (CGWAM) insurance JV with Japan’s largest life insurer, Nippon Life. Created in Beijing to clear bad loans, the venture, which is aided by Great Wall’s acquisition of 50% of the shares in consumer electronics maker SVA Group, is part of Great Wall’s strategy to shed its non-core assets. This new development has undoubtedly shifted weight and will continue to offer many opportunities for Chinese lawyers as more clients seek help to comply with new regulations.
“The expansion of insurance funds’ investment channels will definitely result in an influx in investment in securities, real estate, private equity and infrastructure,” says Duan Song, a partner with Grandall. “This provides Chinese lawyers with more opportunities to render legal services for them in terms of legal risks control, drafting legal documents, negotiations and introduction of investment procedures,” he adds.
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