China’s insurance companies are advised to better scrutinise their investments into PPP projects, according to new rules released by watchdog China Insurance Regulatory Commission.
The guidelines, issued last week together with the Ministry of Finance, are intended specifically to address the overleveraging of local and regional governments by strengthening supervision of insurance capital. That includes instructions for insurance companies not to provide any unauthorised financings to local governments for infrastructure investments.
It also highlights a restriction on private equity investments with guaranteed returns, following similar rules in a notice released earlier this month. CIRC banned insurers’ asset management arms from investing in private equity investment schemes with fixed return guarantees which could potentially turn equity investments into lending to local governments. The measure aims to prevent increasing local governments’ liabilities. Some PPP projects have been used by local governments to borrow money.
CIRC also recommended the creation of a cross-departmental supervisory mechanism at local government level to strengthen risk management of Chinese insurers.
The tightening of regulations on PPP investments follows a series of new rules and guidelines released over the last few months by the government in a bid to toughen supervision of the industry and reduce financial risks. The insurance regulator asked insurance companies to avoid “aggressive investment strategies” and decided to step up supervision of insurers’ asset liability management since April and July of last year, respectively.
“The guidelines of CIRC bring no surprise. The notice is in line with the government’s PPP directives and serves as a reminder not to misuse PPP funding mechanisms. The Ministry of Finance continues to review all the PPP projects in the database and we shall see rationalisation of PPP projects to ensure compliance with PPP directives,” said Vivian Tsang, North Asia rating head of project and infrastructure finance at rating agency Moody’s. She added that the policy direction is positive for the growth of China’s PPP market in a long run.
On the project side, China has been promoting PPP financing to attract private sector capital to fund projects and avoid overleveraging of local governments since 2014. However, the Ministry of Finance started to tighten controls over the country’s massive PPP programme, which comprises projects worth over $2.7 billion, amid concerns over rising debt risks.