I. Regulatory Framework
Regarding overseas investment, Chinese companies are required to comply with the rules of the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) governing overseas investment, however, insurance companies that are subject to separate industry regulations must also comply regulations of the China Banking and Insurance Regulatory Commission (“CBIRC”, formerly known as the China Insurance Regulatory Commission or “CIRC”).
In general, the regulatory framework for offshore investment of insurance companies in the People’s Republic of China (“PRC”, for the purposes of this article, excluding jurisdictions such as Hong Kong SAR, Macao SAR and Taiwan) mainly consists of the following three regulations: Temporary Measures Administration of Foreign Investment Insurance Fund (2007) (“Temporary Measures”)Regulations for the Implementation of Temporary Measures for the Administration of Foreign Investment of Insurance Funds (2012) (“Performing Rules”) and Notification of Policy Adjustments Related to Overseas Insurance Fund Investments (2015)which have undergone significant changes in the qualifying conditions of insurance companies as investors, the varieties that can be invested, the investment ratio and the countries and regions that can be invested compared to Temporary Measures for the Implementation of Foreign Exchange Fund Insurance Applications promulgated in 2004.
In August 2014, CIRC was issued Several Opinions on the Acceleration of the Development of the Modern Insurance Services Industry (“New Ten Rules”)proposed to improve the efficiency of insurance asset allocation, support insurance companies to “go abroad”, and simultaneously expand the scope of foreign investment.
From 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association, it can be observed that at the end of 2019, the PRC insurance company’s overseas investment balance was about 470 billion yuan, equivalent to about 70 billion dollars, accounting for 2.75% of the insurance industry’s total assets at the end of the last quarter of year 2019. Currently, the proportion of overseas investment is capped at 15% of total assets last quarter, which means there is plenty of room for growth in the overseas investment of PRC insurance companies in the future.
However, not all foreign varieties can be invested in by PRC insurance companies. Similar to domestic investments, PRC insurance companies are also faced with compliance complexities such as allocating assets and screening foreign varieties. Therefore, this article aims to discuss the varieties that can be invested in for offshore investments from PRC insurance companies under the CBIRC regulatory framework, which are mainly subject to asset category restrictions and regional restrictions.
II. Asset Category Restrictions
That 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association indicates that in terms of asset allocation, overseas investment of insurers is mainly in equity assets, supplemented by monetary market assets, fixed income assets, real estate, among other categories.
According to Article 31 of Temporary Measures and Articles 11 and 12 of Implementation RulesTypes of assets for offshore investment include monetary markets, fixed income, equity, real estate, equity investment funds, securities investment funds and DIRE.
It should be noted that apart from classifying the types of assets for investment abroad, the regulator has also specifically listed the varieties that can be invested in various types of assets. The list is not limited to Article 31 of Law no. Temporary Measures and Articles 11 and 12 of Implementation Rulesbut also concerns the arrangement of the classification of investment assets, which is called Notice of China Insurance Regulatory Commission on the Strengthening and Improvement of Insurance Yield Investment Ratio Regulation (2014)the appendix “Investable Products in Main Asset Categories” also explicitly lists the varieties that can be invested in foreign investment.
In practice, in terms of investing in insurance companies, CBIRC adopts an “allowlist” mechanism, in other words, insurance companies are only allowed to invest in products that are expressly permitted by CBIRC. However, given the wide range and evolving characteristics of financial products under different types of assets as well as the fact that some offshore financial products do not have appropriate counterparts in the PRC market, there is uncertainty as to whether certain financial products fall into the investable category.
To our knowledge, such uncertainties are very common in monetary markets and fixed income products. For example, certificates of deposit are not expressly permitted by the CBIRC and there is no clear definition of certificates of deposit under PRC laws and regulations, therefore, PRC insurers may have some concerns when considering whether to invest in certificates of deposit. This may require a case-by-case assessment.
In dealing with this problem, given the possibility that there may be differences in financial products with the same name issued in different countries and regions, we suggest starting from the terms and conditions of financial products to analyze whether the characteristics of the product match the definition. varieties that can be invested under the laws and regulations of the PRC and seek further support from the law firms where financial products are issued if necessary.
I, I, I. Regional Restrictions
Appendix I of Implementation Rules list of 46 countries and territories in which PRC insurance companies are permitted to invest, consisting of developed and developing markets. Regarding regulatory practices, according to the Letter of Supervision issued by the CIRC in February 2018, two life insurance companies and one insurance asset management company are required to correct their unlawful foreign investments within one month due to violations of regional restrictions on foreign investment.
For different asset categories, Implementation Rules sets the following limits on the investable area:
- If the type of investment proposed includes monetary market assets, fixed income, and equity, then those assets must be issued or circulated on financial markets in the countries or regions listed in Appendix 1. Furthermore, with regard to convertible bonds, shares and safekeeping receipts, they must be registered for trading on the main exchanges of the countries or regions listed in Appendix 1.
- If an insurer intends to invest directly in the equity of an unregistered company, the unregistered company must be located in the country or region listed in Appendix 1.
- If the insurer intends to invest directly in offshore real estate, the real estate must be located in the core areas of major cities in the developed markets listed in Appendix I.
- If the insurance company intends to invest in securities investment funds abroad, the securities investment funds themselves must be approved or registered by the security regulatory authorities of the country or territory listed in Appendix I. In addition, the underlying assets of the securities investment funds must also be issued or circulated in the country’s or region’s financial markets listed in Appendix I.
- If insurers intend to invest in equity funds overseas, they may be exempt from regional restrictions, provided that the equity fund portfolio companies are at a growth or maturity stage or with a high acquisition value.
- If the insurance company intends to invest in overseas DIRE, the DIRE must be listed on the country’s or region’s stock exchange listed in Appendix 1.
For PRC insurers, “going overseas” is an inevitable trend, however, as discussed above, regulators have set limits on varieties and regions for overseas investments, which requires PRC insurers to assess carefully before investing abroad to avoid compliance risk on the one hand, and also requires Chinese insurance companies to allocate assets fairly and diversify investment risks to obtain stable investment returns on the other hand.