PICC eyes local govt bonds and A-shares

People's Insurance Company (Group) of China (PICC Group) is likely to take advantage of a spurt in bond issuance from local governments to lengthen its portfolio’s asset duration, benefit from tax incentives and support the country’s infrastructure drive.

The insurer is the parent company of PICC Property and Casualty (PICC P&C), China’s largest non-lifer by assets. It revealed that its group-wide asset duration was about five years in its interim results on Monday (August 27), versus nine years for its life insurance unit and less than two years for its property and casualty business in liabilities duration, Wang Xiaoqing, vice president of PICC Asset Management Company, told AsianInvestor on the side-lines of the press briefing on Monday (August 27).  

PICC Group is keen to invest more into long-term assets in order to reduce its duration mismatch. It has an opportunity to do now, as local governments issue a glut of special-purpose bonds over the coming weeks. The debt is typically issued by local governments to fund infrastructure projects and support the economy.

On August 14, China's Ministry of Finance ordered local governments to issue 80% of their Rmb1.35 trillion ($197.79 billion) annual quota of the bonds during August and September, in an effort to offset some of the downward economic pressure generated by China’s ongoing trade conflict with the US. The governments have been directed to issue the remainder of their debt in October.

This would entail a rapid increase in supply; the local governments issued only Rmb150 billion of new special-purpose bonds in the first seven months of this year, so some Rmb930 billion of new bonds are set to hit the market in just two months. That offers long-term investors like PICC Group an opportunity to get access to longer dated assets.

PICC Group’s bond investments, including allocations in treasury, financial and corporate bonds, accounted for the biggest share of its asset portfolio, at 33.7%. This was relatively less than life insurance peers like China Life and Ping An, which had 47.23% and 44.3% of their investment assets in bonds as of June.

The maturities for special-purpose bonds previously tended to be between three and 10 years. But local governments are increasingly issuing 15 and 20 year bonds as infrastructure projects take a long time before they can deliver returns. Longer bonds can also help to reduce refinancing risk, Terry Gao, senior director for international public finance at Fitch Ratings, told AsianInvestor.

Adding bonds can help bolster returns, as well as extending asset duration. The yield of on-the-run local government bonds is 4.4%, a level that Wang acknowledged is considered low by some market observers. However, he noted that investors do not have to pay tax for interest income and capital gain on the bonds, which makes them equivalent to bonds that have a before-tax interest of 6%.

“They are very good products for insurance funds’ allocations…Such products have been a relatively important tool for lengthening our asset durations since this year,” he said.

Previously, PICC Group focused more on investing into non-listed fixed income products such as trust plans and asset management products. But China’s financial watchdogs jointly introduced the unified asset management rules in late April to reduce systemic risks within the Chinese financial system and curb shadow banking, which reduced the supply of non-standard credit assets, said Wang.

EQUITY POSITION

PICC Group also said it will look to take advantage of marked drops in A-share valuations to raise an equity allocation that stood at 4.1% of total investment assets, down from 4.6% from six months ago.

“Market risk [in A-share] has been released after series of declines….The valuations in a batch of the listed companies reflect a margin of safety after the declines,” Wang said. The margin of safety refers to the difference between a security’s market price and intrinsic value.

“From the perspective of long-term investing, we think that we can make strategic allocations in them gradually,” he said in the press briefing, without further elaboration.

The insurer’s plan may make sense. The Shanghai Composite Index fell 17% year-to-date to close at 2,778 on Monday, while the Shenzhen Composite Index dropped 22% to close at 8,721 during the period. However, BNP Paribas Asset Management noted in a July report that China’s economic fundamentals and corporate profitability is stronger today than during the country’s deep stock market sell-off in late 2015 and early 2016.

Chinese onshore equities are also trading at a discount compared with developed markets. The MSCI China A index is trading at an estimated price-to-earnings ratio of 11.6 times for 2018, while the MSCI US and MSCI Europe were trading at P/E ratios of 18 times and 14.5 times, respectively, on August 27.

PICC Group’s total investment assets stood at Rmb874.76 billion as of June 2018, up 2.5% from the Rmb853.4 billion it reported at the end of last year.

Its annualised net investment yield for the first half was 5.4%, lower than the 5.3% seen in the same period last year. But this was much higher than the 4.64% and 4.2% recorded by China Life and Ping An, respectively, over the same time period.

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