China Life said to plan insurance fund this summer

Behind the machinations lies a bid by ChinaƆs insurance regulator to influence the capital markets.

Fund managers in Shanghai say The People’s Insurance Company of China, also known as China Life, is pushing to enter the asset management field and launch a so-called insurance fund before the end of summer.

It is said to be trying to pip the launch of China’s first open-ended mutual fund, being prepared by Shanghai-based Huaan Fund Management and its offshore partner, JF Asset Management.

The rumour mill in China is churning, and the lack of regulation allows for few certainties. The pieces of information coming PensionsAsia’s way tie into two previous stories we broke outside of China: first, that the government is considering broadening restrictions on what entities may own an asset manager; and second, that China’s three largest insurance companies have linked up with fund managers to launch insurance funds.

According to sources in Shanghai and Hong Kong, two facts appear reliable. First, that China Life is the industry’s driving force for entering the asset management business, either with its proprietary business or via a discretionary fund managed by a fund company. Second, it is being supported by China Insurance Regulatory Commission (CIRC), which heretofore has been a bit player in developing China’s capital markets but has recently granted certain approvals for insurance companies to become involved as investors.

Previously, we reported that Nanfang Asset Management (in English, China Southern) has a 6RMB billion contract with China Life to manage a discretionary fund for them, the first such insurance fund of its kind – one that has yet to be approved by the fund companies’ regulator China Securities Regulatory Commission. In addition, Huaan has a similar contract with Ping An Insurance, while Fuguo Fund Management has one with Pacific Life Insurance.

Falling interest rates are killing insurance companies’ returns on bonds and bank deposits, their main avenue of investment. They were recently allowed to allocate up to 10% of their assets to closed-end funds, and some are said to already have up to 15% of their assets in funds, so desperate are they for the returns. In addition, insurance companies are pressing for more freedom to invest in order to better compete with foreigners after China joins the World Trade Organization.

What we are hearing now is that the insurance companies are trying to hasten the introduction of such funds or, if possible, be allowed to launch their own funds to invest in capital markets. Chinese fund managers have told PensionsAsia they fear this possibility, as it means a huge loss of potential business, and believe it will be some years off. Fund managers add they are the natural intermediaries for insurance companies, which lack investment expertise. But fund management companies have a poor reputation in China following last year’s ‘black curtain’ scandal, and insurance companies with their longer investment horizons are said to be keen to manage assets on their own – just like insurers in other countries.

If such a thing occurs, its implications go far beyond the simple question of fund managers’ losing business. China keeps very strict walls between different businesses – commercial banking, investment banking, securities companies, insurance and fund management are conducted by separate entities.

Should insurance companies enter asset management directly, it would start to blur these lines. After that, anything could be up for grabs.

PensionsAsia revealed last month that CSRC was considering allowing entities other than securities companies or investment trust companies to own a fund manager. This could mean a state-owned enterprise or, if the banking rules were changed, a bank – or an insurance company. If the later is allowed to own a fund manager, then surely they will start their own asset management businesses.

As with so many things in China, such decisions hinge on which way the regulators lean. Fund managers in Shanghai say there are fund management companies already ‘informally’ managing insurance assets, and there are already – legally and openly – insurance companies investing in closed-end funds listed on the two stock exchanges. But for insurance funds to take off, whether managed by fund companies or directly by insurers, or by fund companies owned by insurance companies, will all rely on approval from CSRC.

And what no-one knows is what CSRC thinks of this.

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