24 October 2016
China has opened another channel for the nation's insurers to invest in the Hong Kong stock market. Photo: Bloomberg
China has opened another channel for the nation's insurers to invest in the Hong Kong stock market. Photo: Bloomberg

China insurers to emerge as key players in HK equity market

China’s insurance funds are now allowed to invest in the Hong Kong equity market through the Shanghai-Hong Kong Stock Connect scheme, the nation’s insurance regulator said last Thursday.

It marks a departure from the past when Chinese insurers had to apply for specific foreign exchange quota like QDII in order to invest in equities in Hong Kong or other developed markets.

The new rule is expected to spark huge capital flow into the Hong Kong market from the mainland’s insurers.

Known to be rather aggressive players, it would be interesting to see how this group of investors will affect the Hong Kong market. Also, which stocks or sectors the new capital will favor.

China’s insurance industry has seen its total premiums income grow at the pace of about 2 trillion renminbi a year. This points to a huge potential for fund inflows into Hong Kong.

Given this factor, it was not surprising that Hong Kong equities posted notable gains last week following the announcement of China’s new rule.

Three types of Hong Kong shares stood out in the latest rally.

First, stocks that are not available on the mainland, such as Macau gaming plays and firms such as CGN Power (01816.HK), CAR Inc (00699.HK) and Fosun International (00656.HK) .

Second, dual-listed firms whose H-shares trade at a huge discount to their mainland-listed cousins.

Third, firms that are seen as direct beneficiaries of the eased cross-border investment rules on insurers. The list includes stock market operator Hong Kong Exchanges and Clearing Ltd. (00388.HK) and Chinese insurers, brokerages and fund management companies.

Mainland insurers are faced with the challenge of falling bond yields, high valuations of A-shares and record high property prices.

Amid this situation, they are likely to prefer companies with mature business and stable cashflow, especially those that offer high dividend yields.

Such firms can be found in the utilities, telecom, infrastructure, finance, and property sectors

When they find the right target, it won’t be surprising if we see cash-rich mainland insurers purchase strategic stakes in certain Hong Kong firms, or even controlling stakes.

One thing is for sure, their influence over the pricing and valuation of Hong Kong equities will definitely expand in the coming years.

This article appeared in the Hong Kong Economic Journal on Sept. 12.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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