Chinese insurers turn shadow lenders for higher returns
BEIJING/SHANGHAI: Chinese insurers are channelling funds through shadow lenders to real estate and local government infrastructure projects in a bid to boost returns, six insurance and trust sources told Reuters.
The practice undermines Beijing’s efforts to cut local debt risk and curb a property bubble, highlighting the difficulties regulators face in reining in shadow lending and applying regulations uniformly across China’s US$ 15 trillion asset management sector – a key task for the country’s newly merged banking and insurance regulators.
The amount insurers have allocated to alternative assets – trusts, asset management plans and bank wealth management products - has surged rapidly since authorities relaxed investment rules in 2012.
Analysts warn that the complex and opaque structure of such products makes it difficult for insurers to see the ultimate borrowers and to then gauge their real exposure – a risk magnified by the long investment periods involved.
China’s banking and insurance regulator did not respond to a request for comment.
“Our first concern is insurers don’t fully understand the risks involved in what they are investing in because those products are not transparent,” said Qian Zhu, a senior credit officer focusing on insurance at Moody’s. “Those products are also causing liquidity problems for insurers.”
Insurers are allowed to allocate up to 55 per cent of total invested assets in alternative investments.
Those investments accounted
Our first concern is insurers don’t fully understand the risks involved in what they are investing in because those products are not transparent.
for 40 per cent of invested assets in 2017, but the number has risen sharply in recent years. In 2012, the proportion was 9 per cent.
Of the 40 per cent recorded in 2017, the largest proportion was in debt investments, where the funds mostly end up as loans to infrastructure and real estate projects, Reuters analysis of insurance asset management product data shows.
In the three years to the end of 2017, insurers’ investment in loans for infrastructure nearly tripled and nearly doubled for real estate.
Higher yields are the main attraction for insurers. Trust products posted average returns of 9.42 per cent as of the end of 2017, while those on top-rated Chinese corporate bonds were around 5 per cent, market data show.
“Companies have to fight for high- quality non- standard investment projects,” Zhu of Moody’s said of insurers. For less established ones, “it’s mostly about chasing yield.”
Insurers’ interest is showing few signs of abating even as Beijing acts to cool an overheated real estate market in major cities and to reduce system-wide local government leverage, insurers and trust sources told Reuters. — Reuters
Qian Zhu, senior credit officer focusing on insurance at Moody’s