China Tightens Regulations on Investing Insurance Funds in Shares of Listed Companies

by Carlton Fields
Contact

Carlton Fields

Introduction

The entire Chinese economy, including its insurance industry, has experienced rapid growth in recent years. Speculative investments have become an inevitable byproduct of this growth. One of the most well-known examples of a risky insurance company investment was the bitter takeover battle by Evergrande and Baoneng for control of China Vanke Co. Ltd. (Vanke), China’s biggest real property company (by sales). Since 2015, Baoneng has used its majority-owned insurance arm Foresea Life, and other of its units, to amass a 25 percent stake in Vanke. Baoneng is now the company’s largest shareholder. Evergrande units have accumulated 14 percent in Vanke according to its November 2016 regulatory disclosure. Vanke’s shares dropped 16 percent in 2016.

Given these activities, many industry experts believe the China Insurance Regulatory Commission’s (CIRC) recent imposition of restrictions on stock investments by insurance institutions is an attempt to curtail speculative and risky investments. It is interesting to note that the circular "Further Strengthening the Regulation of Investment in Stocks in Insurance Funds" (the 2017 Circular) not only regulates future stock investment, but also does not seem to give any grandfather rights to insurance companies’ existing investments. Instead, it requires them to adjust their investment proportions within two years or the time limit prescribed by the relevant regulatory body until the regulatory requirements are met.

The 2017 Circular

On January 24, the CIRC issued the 2017 Circular. One of its effects was to nullify the section of a 2014 circular titled "Strengthening and Improving the Supervision and Administration of the Use of Insurance Funds" (the 2014 Circular).

The 2014 Circular discussed insurance company investments in listed company shares. This included the right to participate in the listed company’s financial and operating policy decisions, or the ability to control the listed company. The 2014 Circular stated that this is subject to equity investment management and must comply with relevant regulations on equity investment with insurance funds.

In replacing those 2014 provisions, the 2017 Circular specifies additional requirements and restrictions on investing insurance funds in the stock of a listed company.

The 2017 Circular puts the investment in the shares of a listed company into three categories: (i) general stock investment; (ii) major stock investment; and (iii) listed company acquisition. It also establishes a comprehensive solvency adequacy ratio before an insurance company can invest in a listed company’s stock. The categories are differentiated based on: (1) whether the stock investment in a listed company meets or exceeds 20 percent of the listed company’s overall stock capital; and (2) whether such stock investment results in control or actual control over the listed company.

The term "ordinary stock investment" refers to a stock investment in a listed company by an insurance institution or by an insurance institution and a non-insurance person acting in concert, in which the stock investment is: (i) less than 20 percent of the total stock capital of the listed company; and (ii) the investment does not result in control of the listed company.

The term "significant stock investment" refers to a stock investment in a listed company by an insurance institution or by an insurance institution and a non-insurance person acting in concert in which the stock investment is: (i) equal to or more than 20 percent of the total stock capital of the listed company; and (ii) the investment does not result in control of the listed company.

The "acquisition of a listed company" includes becoming the controlling shareholder.

The insurance institution’s solvency ratio at the end of the previous quarter shall not be less than 100 percent when the insurance institution undertakes a general stock investment. When carrying out a major stock investment and acquisition of a listed company, the insurance institution’s solvency ratio at the end of the previous quarter shall not be lower than 150 percent, and the insurance institution must have completed filing of its stock investment management capability and must be in line with the internal control regulatory requirements for insurance fund use.

The 2017 Circular also provides that the insurance institution must use its own funds to acquire listed companies and that an insurance institution may not pledge the listed company’s stock that it is purchasing to finance such purchase.

Other restrictions include that an insurance institution shall apply to the CIRC for prior approval when it intends to purchase shares in a listed company. It also limits the industries in which an insurance institution may purchase shares in a listed company, insurance companies, non-insurance financial enterprises and industries related to insurance business. The key to any of these types of investments is that the company in which the insurance entity chooses to invest has stable cash flow return expectations.

As a general capital rule, the book balance of all equity investments of an insurance company shall not exceed 30 percent of the total assets of such company at the end of the immediately prior quarter.

The book value of a single stock investment by an insurance institution shall not exceed 5 percent of the total assets of the insurance institution at the end of the immediately prior quarter, except as otherwise provided for in the acquisition of listed companies or investment in stocks of commercial banks listed on the Stock Exchange. For insurance institutions that have already increased their blue-chip stock holdings pursuant to relevant policies, the proportion of investment should be adjusted within two years or within the time limit prescribed by the relevant regulatory body until the regulatory requirements are met.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Carlton Fields | Attorney Advertising

Written by:

Carlton Fields
Contact
more
less

Carlton Fields on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!