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China Clamps Down on Insurers’ Overseas Financing

By Yang Qiaoling and Han Wei

Chinese regulators are stepping up scrutiny of insurance companies’ overseas financing activities amid a broader campaign to reduce excessive corporate leverage and rein in financial risks.

The China Insurance Regulatory Commission (CIRC) said Monday that it is limiting how much offshore financing can be backed by domestic guarantees. The new cap is 20% of an insurer’s net assets as of the end of the previous year, according to a circular jointly issued by the insurance regulator and the State Administration of Foreign Exchange (SAFE).

Going forward, insurers must get a go-ahead from the Insurance Asset Management Association, an industry self-regulatory body, for any overseas financing plan to raise more than $50 million or the equivalent backed by domestic guarantees, according to the circular.

The move reflects the regulator’s efforts to curb insurance companies’ debt-driven overseas investments.

In a speech in late January, Chen Wenhui, vice chairman of the CIRC, warned about risks stemming from insurers’ “radical” business operations and said the commission will closely scrutinize companies’ liquidity and credit risks as well as tighten regulations on domestic guarantee-backed overseas lending activities.

Insurers, along with other Chinese companies, have increasingly used guarantee papers issued by domestic banks backed by their domestic assets to get offshore loans and financing for their subsidiaries. The companies see this practice as a convenient, low-cost ways to fund their overseas investments.

But regulators’ concerns mounted as related default risks rose, SAFE spokeswoman Wang Chunying said at a press conference last month. Moreover, some companies have used onshore guarantees to fund overseas shopping sprees while skirting regulatory oversight on their borrowing and investment activities, Wang said.

In the Monday circular, the CIRC said insurance companies will only be allowed to provide debt guarantees for their directly-controlled overseas arms, or units in which their indirect ownership is more than 95%.

Funds raised with domestic guarantees must be managed separately and used for their designated investment projects, according to the circular. The debts will be included in insurance companies’ overall leverage calculations.

“The underlying assets of the investments must follow the country’s industrial and overseas investment rules,” said a CIRC official, adding insurance companies shouldn’t use provisional funds or other assets with repayment obligations for debt guarantees.

China’s onetime-sleepy insurance industry turned into a thorny issue for regulators after cash-rich or financially savvy private companies were allowed to get into the business earlier this decade.

Some newcomers funded their shopping sprees overseas with highly-leveraged borrowing and complex financing structures. Regulators condemned such “irrational” acquisitions, warning they pose risks to China’s overall financial structure. Over the past two years, regulators have started clamping down, restricting the kinds of acquisitions insurers can make.

One of the highest-profile companies to come under scrutiny by the regulator is Anbang Insurance, which bought the landmark Waldorf Astoria New York hotel in 2014.

Contact reporter Han Wei (weihan@caixin.com)

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