20 February 2019
Larger players like China Life Insurance, People's Insurance Co. of China and Ping An Insurance have been building up their stock holding in an orderly way. Photo:
Larger players like China Life Insurance, People's Insurance Co. of China and Ping An Insurance have been building up their stock holding in an orderly way. Photo:

Big Chinese insurance firms will hold sway in China stock market

Despite the recent clampdown on insurers using improper funds to bid up shares in large stakes, this will only be a hiccup in the government’s drive to channel more insurance money into China’s stock market. Here is why.

China’s stock market has always been criticized for the dominance of retail investors, which account for about 70 percent of activity.

To improve the investor mix, Chinese authorities have been encouraging insurance firms to invest more in equities in recent years.

In 2014, the government lifted the stock investment ceiling for insurance firms to 30 percent and further raised that limit to 40 percent after the market collapse last year.

Chinese insurance firms have also been allowed to participate in the Stock Connect program since September.

Still, China’s insurance sector is managing some 15 trillion yuan (US$2.17 trillion) of assets as of the end of October, of which only 1.8 trillion yuan or 12 percent is invested in stocks, far below the 40 percent cap.

Getting more insurance money to be invested in equities will not only boost the presence of institutional investors in the A-share market but also help insurance firms improve their investment returns and achieve better asset allocation.

Although recently, China’s top securities and insurance regulators have been cracking down on the stake bidding activities by several high-profile mid-sized Chinese insurance groups, that move was largely aimed at eradicating their inappropriate practices involving the use of products such as universal insurance.

Universal insurance is relatively flexible and is often tailored to bigger clients.

Numerous mid-sized insurers have been using such products, which often promise high annual return of 8 percent or more over an investment horizon of just five years, to attract new funds.

In order to achieve a quick return high enough to meet the pledge, these insurers usually resort to aggressive bidding of shares to ramp up the stock prices within a short period of time, posing a threat to market stability, sometimes also causing disturbance to the management of the targeted firms.

Against such backdrop, the China Insurance Regulatory Commission suspended sales of the new universal life products offered by Foresea Life, a subsidiary of Baoneng Group, citing non-compliance activities.

It also halted online sales by six insurers including Foresea Life and Evergrande Life, which is owned by China Evergrande Group.

The crackdown has stoked concerns that China’s insurance firms would be under stringent control regarding their stock investments from now on. And China’s domestic stock market will also suffer.

However, the move is all about weeding out ill practices and the incident won’t change the big policy direction.

Chinese authorities continue to support the insurance industry to invest in A shares.

In fact, larger players like China Life Insurance, People’s Insurance Co. of China, Ping An Insurance or state-owned pension funds or social security funds have been building up their stock holding in an orderly way.

In the long run, these big insurance firms will play a much bigger role in supplying the stock market with fresh capital, and changing the mainstream investment style of A shares, including the emphasis on blue-chip stocks rather than the current preference for more speculative small caps.

This could bring fundamental changes to the way mainland equities are valued.

It is estimated that Chinese insurers as a group will invest about 500 billion yuan into the domestic stock market this year, roughly accounting for 20 percent of new capital inflow.

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

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe