China’s insurers allowed to invest in PPPs

Beijing has eased laws governing Chinese institutions' exposure to infrastructure as it seeks to boost investments in the country's domestic market.  

Under the revised rules, insurers will no longer be bound to invest in a limited array of infrastructure sectors, according to a release from the China Insurance Regulatory Commission (CIRC), the country’s industry regulatory body. The current legislation restricts insurers' investments to transportation, telecoms, energy, municipal projects and environmental protection projects. 

In addition to previous forms of investments including debt, equity and property rights, the new rules explicitly state that insurers can invest in the equity of PPP projects. 

Specific requirements on project return, additional guarantees, insurance, credit quality of the controlling party and minimum equity capital have been removed. Instead, the new rule requires the project sponsor to have two years of sound credit history. 

Rating agency Moody’s said that “the revised rules are credit negative for Chinese insurers because they risk increasing insurers’ alternative investments and introducing additional risks and market volatility into insurers’ balance sheets”.

“The revised rules will add to insurers’ risk appetite and increase the amount of high-risk assets in their investment portfolios,” added Qian Zhu, a vice president and senior analyst at Moody’s. 

“Additional risks will come from two areas, an expansion in investable industries and an expansion of the types of investments. The revised rules lift the cap and expand the scope of investments, which will introduce insurers to new, infrastructure-specific risks with which insurers’ current investment teams may not be familiar.” 

The new rules will encourage Chinese insurers to take on more equity-type investment risks given that CIRC has removed the minimum equity capital requirement for PPP projects, Zhu said. 

“We see infrastructure investments in China as having higher risks owning to their lack of transparency and lower liquidity relative to fixed-income investments.” 

Smaller insurers are likely to be more affected as they tend to have a more aggressive investment approach owing to their need to offer higher yield to attract customers. Also, they are less competitive in bidding for large high-quality infrastructure projects and may therefore take on riskier projects, Zhu concluded.