China Warns Insurers Against ‘Covertly’ Funding Local Governments

China told its insurance funds this weekend that they must not provide “covert funding” for local governments, and should rather service the real economy.

The comments from Chen Wenhui, deputy chairman of the China Insurance Regulatory Commission (CIRC), were quoted in state-run Xinhua News Agency, and follow steps Beijing has taken to enforce fiscal responsibility at local government levels.

In January, the CIRC and China’s Ministry of Finance issued a joint guidance warning local governments not to provide guarantees for insurers’ investments.

China’s local governments have in recent years been accumulating and hiding debt through a number of “creative” financing methods, including the use of local government financing vehicles, which are companies set up to skirt restrictions on local governments and obtain loans on the governments’ behalf.

In response, the central government has been attempting to rein in local government borrowing, as part of the first nationwide overhaul of financial regulation since 2003.

At the same time, the country’s regulators have focused on cutting risk in its massive insurance industry. In January, the CIRC published a list of sources of risk for insurers, and tasked regulatory bodies, including city- and province-level bureaus, with tackling each source. Then, on Feb. 13, the national regulator set a new cap of on insurers’ overseas financing, which must now be limited to 20% of an insurers’ net assets.

Insurance companies must “persist in making long-term investments, value investments, and diversified investments,” Chen said, according to the report by Xinhua. Chen said China should effectively prevent insurance institutions from disguising financing to local governments, and instead actively guide them toward investing in the real economy, Xinhua reported.

Contact reporter Teng Jing Xuan (jingxuanteng@caixin.com)