China's insurance companies may soon be allowed to directly trade stocks and possibly issue subordinated bonds to boost their capital base, the China Insurance Regulatory Commission (CIRC) said Tuesday.

A decision earlier this month by the State Council, the cabinet, expressed support to insurance companies entering the capital market directly, which was warmly embraced by both insurers that had long been trading through securities funds and stock investors.

"CIRC will, under the precondition of containing risks, be quick to draft rules that allow insurance funds to, in various ways, directly invest in the capital market," CIRC Chairman Wu Dingfu told an annual conference Tuesday.

Chinese insurance companies have long been lobbying regulators for more investment freedom to enhance returns, a key factor in ensuring their ability to pay claims.

Largely due to policy restrictions, they held 52 percent of their investments, totaling a combined 873.9 billion yuan (US$105 billion) at the end of last year, in bank deposits. Interest rates are at a decades low in China.

The situation looks poised to improve soon. Wu said the State Council agreed at the end of last year, in principle, on a reform measure that permits insurance funds to be invested in infrastructure projects.

The State Council has also agreed to allow all insurance companies to, once certain requirements are met, set up asset management firms to manage their rapidly-growing indemnity funds, Wu said, adding that his commission is already drafting related rules.

Only the PICC Holding Co and China Life - the two state-owned market dominators - have so far established their own asset management firms.

Wu said his commission is also conducting feasibility studies on allowing insurance companies to invest in overseas bond markets.

While giving insurance firms greater leeway in making investments, regulators are also striving to help insurers improve their capital strength and boost repayment capacity.

Wu said his commission is revising regulations to loosen restrictions on both domestic and foreign investors investing in insurance companies.

The official said his commission also supports insurance firms in floating subordinated bonds to bolster their capital base, following the commercial banks' lead.

"Some insurance companies have requested permission to replenish their capital base by issuing subordinated bonds, we are going to support that," he said.

Late last year, the China Banking Regulatory Commission allowed commercial banks to issue subordinated debt to improve their capital adequacy levels.

Both Chinese banks and insurance firms face the problem of capital inadequacy. Some insurance companies still fail to meet repayment capacity requirements after last year's massive initial public offerings by two State-owned insurers significantly boosted the repayment ability of the entire local insurance industry.

Although the Chinese insurance market has maintained a sizzling growth rate of more than 30 percent on average in the past 20 years, Wu said the industry still needs to quicken its pace to ensure a favorable environment.

More than 40 percent of China's some 10 trillion yuan (US$1.2 trillion) in household savings was simply set aside for education, healthcare and old age needs which, by referring to foreign experience, translates into an amount of savings four times that of the nation's total insurance assets with the potential to be spent on insurance instead, he said.

"China's insurance industry is not only not saturated, but has tremendous potential and room to grow," Wu said.

This year, the CIRC will encourage insurance companies to set up specialized subsidiaries and grow into group companies, and will allow mergers and acquisitions among themselves.

The commission plans to selectively approve new insurance companies in a bid to bring in fresh blood, especially in the areas of pension, health and agriculture insurance, he said.

(China Daily February 11, 2004)