China’s Insurance Regulatory Commission (CIRC) Article

China’s Insurance Regulatory Commission (CIRC) has announced that it will now allow domestic insurance corporations to invest in private equity and real estate sectors. Pushpendra Sharma analyses the implications, attractiveness and limitations of these measures.

The insurance industry in China has traditionally been highly regulated. The assets of CIRC totalled 4.57 trillion yuan ($672 billion) as at the end of July 2010. According to a recent report, the industry is expected to grow at a Compound Annual Growth Rate of 28-30% between 2009 and 2013.

CIRC’s new measures allow domestic insurance corporations to invest in private equity and real estate sectors. These measures will give an impetus to foreign private equity real estate firms given the attractiveness to raise capital locally. Furthermore, insurers can invest up to 5 per cent of their assets in private equity and 10 per cent in real estate. Although this is a forward looking initiative, it comes with certain caveats. Insurers are prohibited from investing in commercial residential homes and cannot participate in real estate development. Investments in property-related financial products are capped at 3 percent of assets and companies which intend to invest in private equity firms, should also have net assets over 1 billion yuan. According to Industry sources, it is expected that these measures could unleash as much as $100 billion worth of fresh funding into unlisted firms and the property sector. Through these measures, CIRC's will be able to help the capital-rich insurer’s secure higher returns on investment. Clearly, a huge opportunity beckons.

Insurance companies will still need to go through the CIRC and National Development and Reform Commission (NDRC) in order to gain approval on their investments in the private market. But, despite these limitations, it marks an important milestone in China’s private equity industry. According to CIRC, the rules would enable insurers to better match their assets and liabilities, improve asset allocation, ease investment pressure, diversify risks, and protect asset safety as well as the interests of policy-holders. The real estate sector too will benefit from the new rules, although investing in this sector will not be very straight forward since it takes time to find suitable investment opportunities and the sector has its share of government restrictions.

According to analysts, the measures are also a reflection of the growing importance of the Chinese currency. It signals that global private equity firms would now be eager to tap the enormous pool of local currency, Renminbi. Incentives such as tax breaks and assistance in navigating regulations are being offered to attract foreign private equity firms to establish their funds in local currency. In support, the Chinese government aims to strengthen the nation’s capital markets as well as hopes to create a more efficient system for allocating capital to local companies. By teaming up with the government, foreign private equity firms will get speedier investment approvals besides gaining access to huge pools of capital.

These measures are a part of China’s plan to strengthen its financial services industry and transform its key cities into global financial hubs. Many international funds like Carlyle and Blackstone Group are eager to set up local funds. TPG one of the world’s biggest private equity firms, intends to team up with the municipal governments of two of China’s biggest cities to raise nearly $1.5 billion to set up its first Renminbi fund.

With their substantial assets under management and long investment cycle, international insurance funds have been a substantial and stable part of the investor base in most private equity markets around the world. CIRC’s new measures come as a welcome move in attracting foreign private equity real estate players to tap into China’s regulated yet growing and untapped insurance market.