The A-share market has suffered from constant setbacks since 2018. Listed companies that pledge their shares as collateral for loans are exposed to liquidity risks, which seriously affects the healthy development of China’s real economy.
In this context, the China Banking and Insurance Regulatory Commission issued the Circular on Matters Relating to Creation of Dedicated Products by Insurance Assets Management Companies on 24 October 2018, in the hope of giving play to the advantages of insurance assets in long-term and steady investment, and helping mitigate the liquidity risks of listed companies pledging shares as collateral for loans.
The circular elaborates five aspects:
(1) It sets conditions for product managers and requires that they should be qualified for issuing portfolio insurance assets management products; (2) it specifies the investment targets of the dedicated products, mainly including stocks of listed companies, bonds publicly issued by the listed companies and their shareholders, and non-publicly issued exchangeable bonds; (3) it lays emphasis on the exit arrangements of the dedicated products. They may exit steadily mainly by shareholder transfer, buy-back by the listed companies, block trading, agreement-based transfer, and other means; (4) it lays down measures to control risks of the dedicated products and puts forward specific requirements in terms of dedicated account management, blackout period, duration, investment concentration, registration in advance, information disclosure, related-party transactions, etc.; and (5) it clarifies that the dedicated products are excluded from calculation of investment proportion of equity assets of the insurance companies.
Investment in listed companies has been an important investment channel for insurance funds. Insurance institutions generally invest in listed companies by means of transactions in the secondary market, block trading, subscription of publicly issued and non-publicly issued shares in the listed companies, and even bidding.
What is the significance of the provision of the circular that insurance institutions may invest in listed companies by creating dedicated products? And what is the regulatory idea it reflects? This author analyzes and explores the answers to these questions from the contents of the circular.
First, it is provided in the circular that the dedicated products will be excluded from investment proportion calculation of equity assets of insurance companies, but included in that of other financial assets for regulatory purposes. This provision expands the channels and overall fund limit for investment in listed companies by insurance institutions.
The insurance institutions’ investment in listed companies through non-dedicated products is treated as their equity investment. According to applicable regulatory provisions, the book balance of the insurance institutions’ investment in equity assets should total not more than 30% of the total assets of the insurance institutions as of the end of the previous quarter.
According to the circular, the dedicated products are included in investment proportion calculation of other financial assets for regulation. Although the insurance institutions’ investment in other financial assets is also subject to the restriction that the book balance should not exceed 25% of their total assets as of the end of the previous quarter, this evolution from single-type investment proportion to dual-type helps in raising the overall limit of funds that insurance institutions invest in listed companies.
Second, the regulator issues this circular as a part of its measures to mitigate the liquidity risks of listed companies, which pledge their shares as collateral for loans and safeguard the investment security of insurance funds. Although the circular does not provide the specific means of investment in listed companies through dedicated products, the regulator should encourage the dedicated products to “friendly invest” in listed companies through agreement-based transfer, block trading, and subscription of securities issued by the listed companies or majority shareholders, but restrict hostile investment or takeover through offer and bidding.
In terms of exit methods, it is provided in the circular that the dedicated products may exit steadily through shareholder transfer, buy-back by listed companies, block trading, agreement-based transfer and other means, fully reflecting that the regulator intends to maintain the stability of the asset market.
Is the main exit method of stock selling in the secondary market applicable to the dedicated products? We understand that “other methods” of exit should include stock selling in the secondary market. As the regulator stresses “stability”, however, it does not expect that “fast in and fast out” investment will have any adverse impact on the asset market.
Moreover, the dedicated products should be so designed to meet the requirements for “fund pool”, guaranteed return, multi-layered nesting, product classification, and leverage ratio as provided in the Circular of China Insurance Regulatory Commission on Strengthening Regulation of Portfolio Insurance Asset Management Products and Businesses, issued in 2016, and the Guiding Opinion on Regulating the Asset Management Business of Financial Institutions, jointly issued by the People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, and the State Foreign Exchange Administration in April 2018. In addition, they should be designed with a reasonable blackout period and duration in line with the current conditions of the A-share market and the requirements for investment security of insurance funds.
By now, public information and statistics show that 10 insurance asset management companies, including China Life Asset Management, have registered their dedicated products. Their target size totals RMB116 billion (US$17.25 billion). Some products have been launched for investment in listed companies through agreement-based transfer and block trading.
Out of its demands for stable return on investment, insurance institutions are more prudent in selecting listed companies in which to invest. The author expects to see more insurance institutions invest in listed companies through dedicated products, which not only helps mitigate the liquidity risks of the listed companies that pledge shares as collateral for loans, but also brings long-term stable earnings for insurance funds.
Jiang Tao is a partner at Merits & Tree Law Offices