The State Council has approved plans to let insurers buy foreign currency with their own yuan-denominated funds to invest overseas as the government tries to widen investment channels and boost returns on investments.

"A pilot scheme will be launched in the first half of this year," Wu Dingfu, chairman of the China Insurance Regulatory Commission (CIRC), said at an insurance forum at Peking University yesterday.

The regulator will choose one or two insurance companies to start the pilot scheme and give approval case by case due to the risks involved, Wu added.

The plan comes as China considers having a qualified domestic institutional investor (QDII) programme which would allow companies such as insurers and fund managers to channel yuan assets overseas.

Chinese insurers, which more than quadrupled their assets in the past five years to 1.6 trillion yuan (US$200 billion) as of February 28, have long been hampered by a lack of investment vehicles at home. They are restricted to putting premiums in bank deposits, government and corporate bonds, mutual funds and stocks.

Statistics from the CIRC show that the bonds market and bank deposits are two major investment destinations for insurance companies, accounting for a combined 90 per cent of insurers' total investments.

According to the China Insurance Industry Development Bluebook (2004-05), insurers poured 742.4 billion yuan (US$92.3 billion) into the bonds market (which includes the State treasury, corporate bonds, financial bonds and subordinate bonds), and deposited 516.8 billion yuan (US$64.3 billion) in banks, accounting for 57 per cent and 37 per cent of their total investments respectively.

At the moment, only insurers with foreign-denominated assets can apply to invest overseas.

"As the insurance industry continues to develop and capital rapidly builds up, we'll gradually broaden investment channels," said Wu.

In September, the industry watchdog released detailed pilot regulations to manage insurers' overseas investment. The rules allowed them to invest a maximum of 10 per cent of their foreign exchange capital in overseas stock markets, structural deposits, mortgage securities and monetary funds.

However, the overseas stock investment is only confined to Chinese enterprises listed in securities exchanges in New York, London, Frankfurt, Tokyo, Singapore and Hong Kong.

Ping An Insurance (Group) Co was the first domestic insurer to be allocated a foreign currency quota to invest in overseas bonds and money market instruments.

Last month, CIRC allowed quality insurers to invest no more than 15 per cent of their total assets in infrastructure, and the country's third-largest insurer China Pacific Life Insurance was chosen as the first firm to be able to do so.

"These wider investment options can help Chinese insurers earn more from their investments and help them better match their liabilities with assets," said Wang Guojun, an insurance professor at the University of the International Business and Economics in Beijing.

Market players said the policy loosening was a "major move" in alleviating the pressure which comes from having a lack of investment options for mounting premiums.

Chinese insurers collected a combined 492.7 billion yuan (US$60.8 billion) in premiums last year, up by 14 per cent on 2004. And their combined return on investment last year stood at 3.6 per cent, 0.7 percentage points up on the year before.

(China Daily 04/13/2006 page9)

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