China cultivates more institutional investors for healthier capital market

China unveiled late Sunday regulations that, for the first time, allow insurance companies to invest in its stock markets, a move apparently designed to liberalize and boost its capital market.

The China Insurance Regulatory Commission (CIRC) and China Securities Regulatory CSRC) Commission made public their provisional regulations on the management of insurers' investment in stocks, giving a green light to the direct investment of insurance companies as institutional investors in the stock markets.

Before the regulations were issued, insurance funds in China were permitted to invest only indirectly in stock markets through securities investment firms.

Under the new regulations, the annual investment of an insurer still cannot exceed five percent of the total assets it reports at the end of the previous year.

That means nearly 60 billion yuan (7.2 billion US dollars) from the sector will be allowed to be invested in the stock markets as China's insurance industry recorded one trillion yuan (about 120 billion US dollars) in outstanding insurance funds at the end of August this year.

The Chinese central government published a package of strategies last February to promote the reform and opening up of its capital markets and prop up its stock markets, which have been bearish in spite of the country's fast-growing economic growth over the past two decades.

According to the strategy, China will help cultivate an unspecified number of professional institutional investors, support the direct investment of insurance funds in capital markets, so that institutional investors, mostly fund management and insurance firms, will be the leading force in the capital markets.

China did not open its capital markets to its National Social Securities Fund and qualified foreign institutional investors (QFIIs) until last year.

A total of 27 QFIIs, including Deutsche Bank, Normura Securities, and Citigroup Global Markets Limited, have been allowed to engage in the securities business on the A-share market, China's domestic securities market, since the middle of last year.

Securities regulatory officials said the entry of growing number of institutional investors in the capital markets will help avoid frequent drastic fluctuation of stock prices through reduced speculation.

Chinese fledging stock markets have been plagued by speculative operations by private and institutional investors.

Zuo Xiaolei, chief researcher with Chinastock Co., said that market performances by the QFIIs indicate most of them are rational investors that value blue-chips and base their investment strategies on the vast potential of the Chinese economy, which has grown by 9 percent annually over the past two decades.

Liu Jingde, a senior analyst with Beijing Securities Research and Development Center, said a group of domestic securities firms and funds, influenced by the QFIIs, are paying more attention to the listed firms and their potentials themselves.

According to media reports, China is expected to issue more licenses to QFIIs soon to put an end to the experiment of QFIIs on the markets for more overseas institutional investors, and the quotas of their investment may be increased to 5 billion US dollars, about 20 billion yuan (2.4 billion US dollars) more than the current quotas.

An official with China Securities Regulatory Commission said last week that China would improve its investment environment for various forms of institutional investors and diversify their sources of investment in the coming five years.

Ma Delun, deputy director of the State Administration of Foreign Exchange, disclosed last month that China is considering the feasibility of creating a system of qualified domestic institutional investors in the future. China is also exploring ways to allow foreign organizations and firms to raise money on Chinese markets through issuance of Renminbi-denominated bonds, Ma added.

At the end of August, China had 71 million investors and 1,380 listed firms on its domestic market on the Chinese mainland. The market value of their stocks totaled 3.9 trillion yuan (475.9 billion US dollars). The country's first stock was issued in 1984.

Source: Xinhua