China insurance regulator gets tough on PE investments

Chinese insurers’ asset management arms are now prohibited from investing in domestic private equity funds that offer fixed returns.

China’s insurance regulator has introduced a new set of measures that restricts local insurance companies’ asset management arms from investing in domestic private equity schemes that offer fixed returns on their equity investments.

According to the China Insurance Regulatory Commission, funds such as these only serve as “disguised channels” for raising local government debt. It also noted that proposed returns from such products should reflect actual performance of the investment portfolios, instead of delivering a fixed annual offering.

The CIRC said in a notice on Friday that the new rules are aimed at preventing insurers from turning private equity investments into lending, to already heavily indebted local governments.

Commenting on the new rules, a Shanghai-based fund of funds manager, pointed out that the purpose of the new rule is to avoid adding new debt to local governments as well as to encourage real equity investment instead of debt financing.

Under the new rules, asset management arms of insurance companies also cannot commit more than 80 percent of the actual fund size.

The Chinese government is also zeroing in on public-private partnerships which uses private capital to back infrastructure projects such railways, toll ways and bridges. However, some of these projects are used by local governments to borrow money.

The CIRC added it would prioritise approvals for investments made by insurance companies that meet the government’s economic and regulatory policies, and those in key sectors such as infrastructure and strategic industrial sectors.

The rules are part of an ongoing effort to step up oversight of the insurance industry.

– With additional reporting by Nia Tam