Feb 20, 2013 12:25 PM

New Rules Cast Doubt on Insurer's Deal with City's Financing Platform


(Beijing) – When China Life Insurance (Group) Co. struck a deal with the Suzhou government and its financing platforms, the insurer looked set to be a shareholder in a fund that would primarily back infrastructure building.

Now the prospect is less certain because some interpretations of a new policy, released one month after the deal was reached, cast doubt on whether the agreement is legal.

China Life is not the only insurance company that wants to profit from local government-sponsored operations. Some large insurers, including China Pacific Insurance and New China Life Insurance, have jumped at opportunities to hold a stake in local infrastructure projects, which provide high returns.

That has particularly been the case since the China Insurance Regulatory Commission released a policy in October that permitted insurance companies to invest in more types of equities and immovable properties, giving them more leeway to make investments.

The adjustments were a step in the right direction towards using insurance capital more productively, said Wang Xujin, insurance professor at Beijing Technology and Business University.

In developed markets, insurers have access to a very broad range of financial products, and their investments supply the market with capital in huge amounts, he said. However, Chinese insurers are subject to much tougher restrictions and their returns are meager.

In the past, insurance companies invested in local government financing platforms mainly by buying enterprise bonds. Under the new policy, many had been approached by platforms looking to raise money through not only bonds but other financing options, said a source familiar with the matter.

Dual Obstacles

If all went as planned, China Life might have been the first insurance company to finance a platform's operations through equity investment.

In November, it signed a deal with the government of Suzhou, a city near Shanghai, to invest 6 billion yuan in a 10 billion yuan fund called the Suzhou City Development Industrial Fund.

Suzhou International Development Venture Capital Holding Co. Ltd., a local financing platform, would invest another 3 billion yuan and run the fund as the general partner. The remainder of the shares would be sold to the public in the form of trust products.

The fund, which has not been created, would primarily invest in local infrastructure projects such as the building of low-income housing, its documents shows.

Work to establish it has been put on hold because a policy, jointly issued by four central government departments in December, has cast a shadow over two important clauses of the agreement.

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