How long before Chinese insurers venture offshore?

The volatility of the A-share market has become an embarrassment and together with renminbi devaluation is driving Chinese insurers out of their comfort zone and into global markets, an AsianInvestor forum heard.

Larry Wan, chief investment officer at Shanghai Life, said peers in China had become interested in diversifying overseas in part due to uncertainty over the RMB exchange rate.

While he suggested the currency would remain stable over the next six months to one year, he said the picture was far less clear-cut over the longer term.

“I am sure the government is doing everything to stabilise the renminbi,” Wan told AsianInvestor’s second annual China Global Investment Forum in Beijing. “But whether they have the ability to fight against the [depreciation] trend over the long term, I am not so sure.”

After China liberalised its exchange rate for the first time in 2005, the renminbi has embarked on a measured one-way appreciation path against most currencies. But the RMB’s purchasing power has weakened, with the man on the street feeling that real inflation was double or even triple the 2-3% official average consumer price inflation rate during the decade.

Accelerating this trend, on August 11 the People’s Bank of China surprised the market by devaluing the RMB against a strong dollar. “How far it [depreciation] will go, I am not sure,” said Wan.

“So as an investor, as an insurance company, we are really interested to diversify our assets into other asset types, including real estate, trust funds and overseas investment.”

Wan conceded that with an AUM of less than $1 billion, Shanghai Life had relatively narrow investment channels open to it. “We do not think much about global allocation right now,” he affirmed.

But he said it would become a must in future, with Shanghai Life having already applied to the State Administration of Foreign Exchange (Safe) for a foreign currency licence and sought approval from the China Insurance Regulatory Commission (CIRC) to invest overseas. “I am pretty sure we will invest actively in overseas markets such as the US and Europe,” he said.

Wan’s views reflect the changed outlook of Chinese insurers since last year, when most remained hesitant to invest internationally due to higher domestic returns combined with inexperience in global markets and fear of failure.

At the end of last year, just 1.44% of the Chinese insurance industry’s Rmb10.2 trillion ($1.6 trillion) in assets had been invested internationally, some three years after the CIRC tripled companies' overseas asset allocation allowance from 5% to 15%.

Outside top-tier firms such as China Life, most domestic insurers have tended to limit their offshore exposures to securities listed in Hong Kong and Singapore, as well as global real estate.

But panel moderator Janet Li, Greater China director of investor services at Towers Watson, summed up sentiment best by noting that excessive volatility in the A-share market and the August widening of the RMB trading band were catalysts for Chinese insurers to diversify.

Cho Sung Sik, managing director at Korea's Mirae Life, pointed out that the A-share market was simply too volatile for most institutional investors. “From the perspective of volatility, China A-shares are somehow an embarrassing asset class,” he said, noting the A-share market had not reflected China’s economic growth of the past six years.

In response to a question from the audience about when Chinese insurers would commonly move out of real estate and into global markets more broadly, Wan estimated within the next two or three years, pointing out they would need time to adjust due to their inexperience, particularly in areas such as private equity, venture capital and timberland.

“The learning curve is not that long,” he said. “After two or three years of testing the water in global markets, some pioneering insurers will step out of their comfort zone to invest in sub-asset classes [beyond real estate].

“Certainly some have already invested or are looking closely at private debt, private equity, secondary [markets] and fund of funds. Some of these things have been progressing very fast.”