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New Rules Allow Insurers to Invest Abroad

China's foreign exchange (FOREX) and insurance authorities are formulating rules to allow insurance companies to invest their FOREX holdings in international capital markets to boost their returns, a senior FOREX regulator said on June 23.

Ma Delun, deputy director of the State Administration of Foreign Exchange (SAFE), said his commission is drafting a regulation that would allow 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 allowed to invest in bank deposits, treasury and selected corporate bonds, and trade stocks through securities investment funds only.

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 convertible only under the capital account, which includes portfolio investments. 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.