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China's insurance companies have recently been granted permission to invest their assets directly into the stock market. If cautious approaches are always taken against investment risks, this long-expected permission will not only broaden the investment channel of China's insurance industry but also cheer up the lacklustre stock market, said an editorial in the People's Daily. An excerpt follows:
On October 24, the China Insurance Regulatory Commission and China Securities Regulatory Commission jointly issued provisional rules allowing China's insurance companies to invest 5 percent of their total assets, about 50 billion yuan (US$6 billion), directly into the stock market.
Before the new rules came into effect, insurance funds were only allowed a very few investment channels, like bank deposits, treasury bonds, financial debt, securities investment funds and corporate debt, which promise stable yet very shabby yields. Besides diversifying portfolio and dispersing investment risks, direct access to the stock market will also pep up insurers to improve their ability to settle claims. A more professional and internationalized insurance industry is likely to be seen in China's near future.
Accordingly, these new rules also bestow China's stock market with stronger capital inflow and investors with increased diversification in their portfolio. Insurance funds, especially life insurance funds, could provide the stock market with stable capital flow in the long term. This would attract more institutional investors to enter the market, therefore improving investors' structure. In addition, as insurers, who focus more on long-lasting returns, become shareholders of some listed companies, risks resulting from short-sighted corporate decision-making are more likely to be evaded.
However, the potentially highly profitable stock market is always accompanied by high risks. Insurance companies' money is crucial for saving lives and staving off disasters, so they cannot afford to put it at even a little risk. Therefore, sufficient risk control and appropriate fund management should be guaranteed within the insurance industry.
The closer contact between insurance and stock markets does not mean a freer permeation of risks between the two markets. In this sense, tightened regulations and a transparent information disclosure mechanism are needed to guard against possible chaos within the two markets.
Compared to the capitalization of China's capital market, which totals about 4 trillion yuan (US$483 billion), insurance companies' investment will be a small amount, but its impact cannot be underestimated. China's insurance industry is now enjoying a rapid growth and its promising prospects will encourage an improved performance of China's now monotonous stock market.
(China Daily October 28, 2004)
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