By Song Hongmei (Chinadaily.com.cn)
Updated: 2007-07-17 17:13

China will allow insurance companies to double the proportion of assets they may hold in domestic stock markets in a plan that is expected to be announced at an insurance working conference held today in Beijing.

Insurance companies will now be allowed to invest 10 percent of their assets in the stock market; the previous cap was 5 percent.

Industry executives of some insurance companies said they have been told either via email or fax to prepare to buy more stocks by the China Insurance Regulatory Commission (CIRC), the country's industry watchdog.

The move is part of a government effort to broaden the scope of investment channels for insurers, who currently have most of their assets in low-yield bank deposits and bonds.

Given that domestic insurers' assets totaled 1.97 trillion yuan (US$260.5 billion) by the end of 2006, the move could potentially release up to 200 billion yuan into the domestic stock market. By 2010, the total assets of Chinese insurers may hit 5 trillion yuan and 500 billion yuan will be invested in stocks.

The capital market has become a primary channel for insurers to diversify their investments. And at the same time the proportion of bank savings keeps being reduced.

Last year, bonds, stocks and funds represented about half of investment on behalf of insurance companies and more than 60 percent of investment by some life insurers.

Statistics also showed that by the end of 2006, insurers' stock investments were almost five times that of the beginning of last year to reach 92.92 billion yuan, and insurance funds in bonds and funds dropped 17.61 percent to 91.21 billion yuan over the same period.

Opening the door for insurers to plow more money into domestic stocks caters to their development, according to insurance insiders.

Despite fluctuations in the stock market, the policy demonstrates that CIRC is bullish on the stock market in the long run, said a source close to the regulator.

Although they are allowed to invest more money, insurance companies will stick to their investment principles, pursuing long-term and stable returns and not buying stocks immediately at a large scale, industry insiders said.

China has relaxed restrictions on insurers' investment options over the past two years. In 2005, insurance companies were allowed to invest one to two percent of their assets in domestic equities. And the ceiling was gradually raised to 5 percent in 2006.

According to CIRC, Chinese insurers earned 8.9 billion yuan by investing in the country's bullish stock market last year. The yield of stock investment for the entire insurance industry was 27.1 percent, more than four times that of returns on the insurance funds.

The insurance sector made 93.2 billion yuan on all investments last year, with a yield of 5.82 percent and doubling that of 2005.