A regulatory clampdown on speculation by insurers and new limits on outbound capital flows are causing one of China’s most acquisitive industries to hit the brakes.
Chinese insurers, after announcing almost $100 billion of deals over the past three years, haven’t made any acquisitions so far in 2017, data compiled by Bloomberg show. Anbang Insurance Group Co., Ping An Insurance (Group) Co. and China Life Insurance Co. were among some of the active acquirers last year, snapping up assets ranging from a U.S. hotel chain to an auto website operator.
The China Insurance Regulatory Commission has cracked down on the industry in recent months, pledging to nip systemic risks in the bud. At a briefing in Beijing on Wednesday, the chairman of China’s top insurance watchdog vowed to rein in “drastic investments and blind acquisitions” by some insurers. The regulator has used especially harsh language to criticize short-term speculation by some insurance companies.
The CIRC “will never allow insurance to become a rich man’s club, let alone allow financial crocodiles to use insurance as their channel or hideout,” Xiang Junbo, chairman of the regulator, said during the briefing in Beijing. Any insurer that “challenges the regulatory bottom line, tarnishes the industry’s image or harms the people’s interest” will be driven out of the market, he said.
The nation has also taken a tough stance on capital flight to prevent further weakness in China’s currency. The government has bolstered capital curbs, limiting companies’ abilities to buy overseas assets as well as the transfer of currency abroad. Banks in January were ordered to stop processing border yuan payments until they balance inflows and outflows and most offshore investments of $10 billion or more by the country’s companies have been barred. Chinese also face tougher reporting requirements when they want to convert yuan into foreign currency.
China’s insurance regulator, meanwhile, has tightened curbs on investment-type policies as rapid sales have heightened liquidity risk, and restricted insurers’ acquisitions of listed companies.
Insurers should focus on fixed-income instruments rather than equities, and seek more financial investments in stocks rather than strategic deals, the CIRC’s Vice Chairman Chen Wenhui said at the same briefing. Some insurance companies in recent years relied on investments as their largest source of profit and main business instead of underwriting risks, which is “incorrect,” he said.
In January, the CIRC issued new rules banning insurers from jointly acquiring listed companies with investors from other industries. When acquiring control of public companies, insurers also need to seek regulatory pre-approval, use their own money, and limit targets to the financial industry or insurance-related businesses with stable cash-flow expectations, according to the new rules.
The CIRC still supports insurers to allocate assets globally, after their investment yields dropped amid declines in the domestic stock and bond markets, CIRC’s Chen said. Insurers’ overseas holdings remain at just 2.3 percent of their assets, far below the 15 percent regulatory ceiling, he said.
“I don’t dare to say it will be the most difficult year” for insurers’ investments in 2017, Chen said. “But it’s my judgment that this year remains very difficult.’
— With assistance by Dingmin Zhang