I. Regulatory Framework
When it comes to overseas investment, Chinese enterprises 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 which are subject to separate industry regulation shall also comply with the rules of the China Banking and Insurance Regulatory Commission (“CBIRC”, previously known as China Insurance Regulatory Commission or “CIRC”).
In general, the regulatory framework for overseas investment of insurance companies in the People’s Republic of China (“the PRC”, for the purpose of this article, excluding jurisdictions as Hong Kong SAR, Macao SAR and Taiwan) mainly consists of the following three regulations: the Interim Measures for the Administration of Overseas Investment of Insurance Funds (2007) (“Interim Measures”), the Implementation Rules for the Interim Measures for the Administration of Overseas Investment of Insurance Funds (2012) (“Implementation Rules”) and the Notice on Adjustment of Relevant Policies for Overseas Investment of Insurance Funds (2015), which have undergone significant changes in the qualification conditions of insurance companies as investors, investable varieties, investment ratios and investable countries and regions compared with the Interim Measures for the Administration of Overseas Application of Insurance Foreign Exchange Funds promulgated in 2004.
In August 2014, the CIRC issued the Several Opinions on Accelerating the Development of Modern Insurance Service Industry (“New Ten Rules”), proposing to improve the efficiency of insurance assets allocation, support insurance companies to “go abroad”, and expand the scope of overseas investment correspondingly.
From the 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association, it can be observed that as of the end of 2019, the balance of overseas investment of PRC insurance companies was about 470 billion yuan, equivalent to about 70 billion dollars, accounting for 2.75% of the total assets of the insurance industry at the end of the last quarter of 2019. Currently, the proportion of overseas investments is capped at 15% of total assets last quarter, which means there is plenty of room for future growth in overseas investments of PRC insurance companies.
However, not all overseas varieties can be invested by PRC insurance companies. Similar to domestic investment, PRC insurance companies are also faced with compliance complexities such as allocating assets and sifting overseas varieties. Therefore, this article aims to discuss the investable varieties for overseas investment of PRC insurance companies under the regulatory framework of the CBIRC, which are mainly subject to asset category restrictions and regional restrictions.
II. Asset Category Restrictions
The 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association indicates that in terms of asset allocation, insurance institutions’ overseas investments were mainly in equity assets, supplemented by monetary market assets, fixed-income assets, real estate, among other categories.
According to Article 31 of the Interim Measures and Articles 11 and 12 of the Implementation Rules, the types of assets for overseas investments include monetary market, fixed-income, equity, real estate, equity investment funds, securities investment funds and REITs.
It is worth noting that in addition to classifying the types of assets for overseas investment, the regulator has also specifically listed the investable varieties under various types of assets, such list is not limited to Article 31 of the Interim Measures and Articles 11 and 12 of the Implementation Rules, but also involves the regulation on classification of investment assets, which is named the Notice of China Insurance Regulatory Commission on Strengthening and Improving Regulation of Insurance Proceeds Investment Ratios (2014), its appendix “Investable Products under Major Categories of Assets” has also explicitly listed investable varieties for overseas investments.
In practice, in terms of investments of insurance companies, CBIRC adopts an “allowlist” mechanism, in other words, insurance companies are only allowed to invest in those products expressly permitted by the CBIRC. However, given the wide range and the evolving characteristic of financial products under various types of assets as well as the fact that some overseas financial products do not have exact counterparts in the PRC market, thus, uncertainty exists as to whether certain financial products fall within the investable category.
To our knowledge, such uncertainty is particularly common in monetary market and fixed-income products. For instance, 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 insurance companies may have some concerns when considering whether to invest in certificates of deposit. This may need a case-by-case assessment.
When encountering such issues, considering that there may be differences in financial products with the same name issued in different countries and regions, we suggest starting with the terms and conditions of financial products to analyse whether the characteristics of the product are in line with the definition of investable varieties under PRC laws and regulations and seeking further support from law firms where the financial product is issued if necessary.
III. Regional Restrictions
Annex I of the Implementation Rules list 46 countries and regions in which PRC insurance companies are permitted to invest, consisting of developed markets and emerging markets. As for the regulatory practice, according to Supervision Letters issued by the CIRC in February 2018, two life insurance companies and one insurance asset management company were required to rectify their unlawful overseas investments within one month due to violation of the regional restrictions on overseas investment.
For different categories of assets, the Implementation Rules set out the following restrictions on investable regions:
- If the type of the proposed investment falls into monetary market, fixed-income and equity assets, then the aforementioned assets must be issued or circulated in the financial markets in the countries or regions listed in Annex 1. Furthermore, when it comes to convertible bonds, stocks and depository receipts, they must be listed for trading on the main broad of the stock exchange of the countries or regions listed in Annex 1.
- If insurance companies intend to invest directly in the equity of an unlisted enterprise, such unlisted enterprise must be located in the countries or regions listed in Annex 1.
- If insurance companies intend to invest directly in overseas real estate, such real estate must be located in the core areas of the major cities in the developed markets listed in Annex I.
- If insurance companies intend to invest in overseas securities investment fund, the securities investment fund itself must be approved or registered by the security regulatory authority of the country or region listed in Annex I. Moreover, the underlying assets of the securities investment fund must also be issued or circulated in the financial market of the country or region listed in Annex I.
- If insurance companies intend to invest in overseas equity fund, they can be exempted from the regional restrictions, provided that the portfolio companies of the equity investment fund are at the growth or maturity stage or with a high acquisition value.
- If insurance companies intend to invest in overseas REITs, such REITs must be listed on the stock exchange of the countries or regions listed in Annex 1.
For PRC insurance companies, “going abroad” is an inevitable trend, however, as discussed above, the regulator has set restrictions on both varieties and regions for overseas investments, which requires PRC insurance companies to assess prudently before making overseas investments so as to avoid compliance risks on the one hand, and also requires PRC insurance companies to allocate assets reasonably and diversify investment risks to obtain stable investment returns on the other.