Chinese insurers eye PE amid QDII quota freeze

Chinese insurance firms are having to think more strategically about how they get offshore exposure, as the ongoing suspension of QDII quota approval is limiting their ability to achieve target returns.

Spurred by renminbi weakness and A-share volatility, mainland insurers are keen to diversify their portfolios internationally. But they need new qualified domestic institutional investor (QDII) quota to fund new overseas mandates, and that has not been forthcoming since March this year.

This is forcing institutions to seek out the best routes offshore within the constrained channels available, said Janet Li, Greater China director of investor services at investment consultancy Towers Watson. 

Some Chinese insurance companies are looking at overseas private equity and private debt, said the Hong Kong-based investment executive at a mainland insurance group. 

Since insurers do not know when they will be able to obtain more QDII quota to make allocations to new asset classes, they may use outstanding allowance to allocate to investments such as foreign private equity. The thinking is that it makes sense to diversify into different investments while they can, as they can switch positions in liquid financial assets such as stocks and bonds without needing extra quota.

Fortunately insurance firms have not yet been asked to cash in or reduce overseas positions, said the insurance executive. “I think the suspension of QDII quotas is enough of a signal that China wants to prevent capital outflows.”

The State Administration of Foreign Exchange (Safe) has not approved any new QDII quotas – which allow investment in foreign assets – since March. Hence the total $89.99 billion in QDII quota held by a total of 132 domestic institutions has not grown for some five months.

Two of the biggest life insurers – Ping An Insurance and China Life – respectively hold QDII quotas of $7.2 billion and $3.6 billion and received their latest quotas in January and February.

In another sign of quota shortage, Chinese fund managers have been suspending QDII fund subscriptions. Earlier this month Guangzhou-based GF Fund Management – which has a relatively small quota of $600 million – suspended new subscriptions of more than Rmb1 million ($156,700) to seven QDII funds.

Meanwhile, Shenzhen-based Invesco Great Wall has suspended subscriptions to its Greater China mixed-asset QDII fund and Penghua Fund has suspended subscriptions of more than Rmb5 million to its global high-yield bond fund.

The temporary QDII suspension is a way for the China government to control the amount of capital outflow in the short term, in the same way that it suspends IPOs to help stabilise the stock market, says Chi Lo, senior Greater China economist at BNP Paribas Investment Partners.

Safe did not respond to a request for comment for this article.