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CIRC could boost real assets allocation to 30%

China’s regulators are discussing raising the limit on the insurance industry’s allocation to real assets by 10 percent in the pursuit of higher returns.   

The China Insurance Regulatory Commission currently is holding discussions with a select group of domestic insurance professionals about raising the cap on the insurance industry’s investments in real assets, PERE has confirmed.

A circular draft entitled “Notice on strengthening and improving the ratio administration on insurance capital application” was sent out to certain departments in insurance companies this month for their review, with the suggestion of raising the maximum allocation of an insurance company to real assets (including real estate and infrastructure) to 30 percent from the current 20 percent. Given the Chinese insurance industry’s RMB 8 trillion (€955 billion; $1.3 trillion) of capital at its disposal, a 30 percent allocation could translate to about RMB 2.4 trillion of potential investment capital dedicated to real estate and infrastructure.

The circular had another important aspect, according to Joel Rothstein, Beijing-based partner at law firm Paul Hastings: it has streamlined the requirements and tests administered on insurance companies to determine whether they are eligible to invest in real assets. The new rules would reduce the number of things the regulator looks at within a company from 56 to 14, focusing primarily on assets under management and profitability of the insurance company. If adopted, this circular would open many smaller insurance companies to real asset investing, Rothstein told PERE.

“The goal of this increased allocation is to boost investment returns,” Rothstein said. This circular would represent the third round of changes to insurer’s investment requirements, following the opening of the industry to real estate in 2010 with a 10 percent limit and then boosting that limit to 20 percent last year. “By international standards, this [new limit] is quite high.”

Another China-based lawyer, however, also pointed out that the limit on insurer’s overseas investments remains at 15 percent overall. Unless that is changed, she believes that the impact on international real estate will remain minimal.

Still, the sheer amount of capital that would need to be deployed to meet that 30 percent cap would require going overseas, according to one of China’s insurers. “The domestic market is simply not big enough,” the insurer’s head of real estate said.

Most insurance companies in China have not yet reached the current 20 percent cap, and it will take some time to get there. Hence, the insurer’s head of real estate predicted that most Chinese insurers will remain cautious for the foreseeable future. “The government can encourage further investment, but [what they invest] will depend on the market risk,” he said.