24 May 2019
Pension funds are expected to enter the mainland stock market soon. Photo: China Daily.
Pension funds are expected to enter the mainland stock market soon. Photo: China Daily.

Is the rally in Chinese insurance stocks justified?

A number of mainland insurance stocks surged 7-8 percent on Monday on hopes that Chinese pension funds are about to enter the stock market.

Lou Jiwei, president of the National Council for Social Security Funds (NCSSF), said on the eve of the Lunar New Year that some provincial governments want the council to manage their pension fund portfolios, according to local media reports.

Reports also say Guangxi province has signed a pension investment contract with the NCSSF worth 40 billion yuan (US$5.81 billion).

China’s pension fund is a massive 4 trillion yuan. The State Council has given the green light for the pension fund to allocate up to 30 percent of its net asset to equities.

However, the NCSSF requires approval from local authorities to invest and manage the funds on behalf of the local governments.

But does that make pension fund buying a legitimate reason to push up the share prices of insurance plays? Not if you take a look at the daily trading volume.

Pension fund buying may drive up share prices and hence the investment return and profitability of insurers, but pension funds won’t rush into the market in one go. They will pace their moves instead.

Given that the daily turnover of A shares easily exceeds 100 billion yuan, the daily incremental amount of pension fund inflows at a size of say, 10 billion yuan, is not going to make a huge difference.

Some say improving economic data is the reason, pointing to the fact that the nation’s purchasing managers’ index has started to bottom out since the second quarter of last year, and other economic data like corporate earnings have also picked up.

However, A shares have almost been unchanged in recent days.

In my view, rising interest rates might be the real factor behind surging insurance stocks.

Insurance firms usually invest heavily in bonds, and higher interest rates would boost their investment income.

The low-rate environment is coming to an end. The People’s Bank of China has raised some lending rates on its MLF loans for the first time since it debuted the liquidity tool in 2014. That works like a rate hike. The 10-year government bond yield has been moving up both in China and the US since November.

So shall we jump onto the bandwagon?

The rule of thumb for investment decisions is whether the company can sustain earnings growth in the coming years.

Before China can transform its economy successfully, I don’t think Chinese insurers or banks can be a growth story.

Another 10 percent upside? Maybe. But it would be hard to say what comes after that.

This article appeared in the Hong Kong Economic Journal on Feb. 8

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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