Insurance Industries to be Challenged If China Opens Door to Foreign Investment

The new policies could be a game-changer with the potential to shake up the market order in China’s financial industries.

Author: Selina Cheng   

People's Bank of China (PBOC) Governor Gang Yi laid out a clearer timetable on Wednesday for opening its financial sector to more foreign investment by the end of 2018.

Although China has sent multiple messages of welcome to foreign investment over the past few years, this is the first time that the head of the PBOC mapped out specific details and timelines with some steps promised to be in place as early as June.

The new policies could be a game-changer with the potential to shake up the market order in China's financial industries.

The biggest impact will be on the insurance industry in China. Following Xi's pledge the day before to speed up the opening of the insurance sector, Yi said he wants to make sure foreign companies are able to compete on an equal footing with domestic companies. To do that, China will raise the ownership limit to 51 percent within a few months and fully scrap the restriction in three years.

The government will also remove a requirement that foreign insurers must have a representative office in China for two years before they can set up a company, further easing foreign access to the insurance sector.

The Chinese typically love to purchase offshore insurance products, especially U.S. dollar-denominated life insurance. The products became so popular that thousands of Hong Kong insurance agents flooded into mainland China to sell or promote Hong Kong insurance products to consumers.

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Mainland customers lining up to buy Hong Kong insurance products

Such transgressions "disturb domestic insurance market order, mislead consumers, obstruct foreign exchange regulation and help money laundering," the China Insurance Regulatory Commission (CIRC) said last year in an announcement.

In response, the Chinese government closed all websites and social media accounts that were involved in the selling, and it deemed the solicitation of mainland consumers to buy offshore insurance products as illegal.

Given the circumstances, any new policy on easing foreign access to the insurance sector is of great significance to the Chinese insurance industry. With the new policy, the form of foreign investment in the insurance industry can be more flexible. Foreign insurers could hold a controlling position in joint ventures, or they could choose to operate as a wholly owned subsidiary and bring offshore products directly to Chinese customers.

Although stock indexes rose overall, several of China's largest insurance firms listed on the Shanghai and Shenzhen Stock Exchanges fell on the news that foreign competition could increase. China Life Insurance Co. Ltd. was down 0.8 percent, Ping An Insurance Group Co. of China Ltd. was down nearly 1 percent, and New China Life Insurance Co. Ltd. fell 1.8 percent.

In contrast, insurances companies listed in Hong Kong and New York enjoyed a big boost from the news. AIA Group Ltd. rose nearly 5 percent and Prudential Financial rose 2.54 percent to close at HKD $202 per share. Shares of Fanhua Inc. (Nasdaq: FANH) jumped nearly 6 percent today in New York and China Life Insurance Co. Ltd. (NYSE: LFC) rose slightly.