| Foreign investment caps on Chinese insurers go up |
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| 09/12/2007 | |
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Shares of insurers in mainland China are in rally mode following a decision by the country's Insurance Regulatory Commission to triple Ping An's overseas investment quota. Ping An, China's second-largest mainland insurer, can now purchase foreign currency totalling 15% of its assets to invest in Hong Kong stocks and other equity deals, says Major Teng, Chief Investment Advisor at Shanghai-based Everbright Securities. The decision has fuelled expectations that other institutions will soon be allowed to boost their international assets. The Commission's decision has refocused attention on Qualified Domestic Institutional Investor (QDII) licenses, which are government set quotas that allow Chinese institutions to invest in Hong Kong and non-mainland markets in an effort to curb excess liquidity and curtail foreign exchange pressure. The government will release more details of its overseas investment regulations in the weeks ahead, says Teng. "The quotas are mostly for the Hong Kong market. For key projects, such as IPOs, these large insurers may be allowed to target other markets." QDII flows So far, twenty insurance companies have been granted QDII licenses and another three are pending. While the move could be a powerful catalyser for Hong Kong stocks, a number of obstacles remain. Xu Zhimin, a quantitative analyst at GuotaiJunAn Asset Management sees policy risk as the main hurdle. "At present, the investment allocation for different target markets is not regulated and remains in the planning stages," says Zhimin. "QDII flows have mostly gone to the Asia-Pacific region, excluding Japan, because it is the most flourishing target market and earnings ratios are relatively higher in Asia compared to other regions. In addition, mainland investors prefer to invest in a familiar target market." Institutions are not the only mainland players looking to diversify their holdings. In April 2006, China announced a set of measures to give individual savers greater access to foreign assets. Among these, depositors in domestic banks were allowed to buy foreign-exchange-linked products with renminbi funds. In the past, depositors were required to furnish foreign currency to have access to such products. "Individual investors are now permitted to acquire up to $20,000 a year in foreign-asset-based mutual funds under QDII, although the availability of such funds is currently quite limited," notes an IMF report on Asia and the Pacific region. "Although the measures represent a potentially important alternative for Chinese domestic investors, early results from the program have been somewhat disappointing," concludes the report. "A major difficulty with the existing channels is that they have been restricted to fixed-income, and retail investors have come to expect that any interest rate gains from higher yields outside China will be absorbed by future renminbi appreciation." Nascent market While it is difficult to quantify the potential capital outflows from mainland households, the combined QDII quotas granted are still modest. In early November, Li Dongrong, deputy head of the State Administration of Foreign Exchange, announced that the investment quota under QDII had reached $42bn by the end of September. "A total investment of $10bn was made in overseas markets," according to the foreign exchange watchdog. The QDII quotas also include 21 banks, including Chinese and foreign lenders such as HSBC China, Deutsche Bank, Agriculture Bank of China and Shaghai Pudong Development Bank. They have been given a combined quota of $16bn. In addition to the banks, Chinese asset managers are trying to get a foothold in Hong Kong. According to the Closer Economic Partnership Agreement, qualified mainland fund management firms will be allowed to launch Hong Kong branches starting January 1, 2008. "The recent adjustment of the Hong Kong market had a direct impact on QDII-issued products," says Zhimin. "In the long term, however, with the digestion of the US debt crisis and the entrance of continental investors, we find the Hong Kong market as compelling as before, especially the stock of Hong Kong state-owned enterprises. In the short-term, the adjustment may very well continue." VB |
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