Govt tightens oversight of insurers' overseas financing

China has tightened its regulation of the country's insurers' overseas financing activities, aiming to reduce their capital leverage and prevent the illegal transfer of onshore assets to overseas markets.

China's insurance and foreign exchange regulators issued a notice this week requiring that the value of insurers' overseas financing guaranteed by their onshore assets must not exceed 20 percent of their total net assets at the end of the previous quarter.

The regulators also banned insurers from using onshore assets backed by debts as collateral for their overseas borrowing and required that insurers must control at least 95 percent of the stake in their overseas financing entities.

Insurers must also report to the regulators on any overseas financing deals with a value exceeding $50 million, according to the notice.

Chinese insurers have been actively seeking overseas financing to support their outbound mergers and acquisitions as financing costs have been lower than those on the domestic market. Many of them have chosen to use onshore assets as collateral for their overseas financing.

"It has helped insurers broaden their financing source ... but problems of liquidity risks, high leverage and refinancing risks have emerged," the regulators said in a statement.

"The purpose of the notice is to ensure sustainable and healthy development of overseas investment of insurance funds and to effectively prevent risks associated with their overseas financing and investment," the regulators added.

Chinese insurers including the high-profile Anbang Insurance Group have carried out a host of major overseas M&A deals over the past two years, sparking regulators' concerns about potential foreign exchange fraud and the illegal shifting of onshore assets to overseas markets.

Insurers have delayed or canceled their overseas investment plans as Chinese regulators have tightened capital controls and their scrutiny of illegal capital outflows.

Zhu Junsheng, an insurance researcher at the Development Research Center of the State Council, said the latest regulation could reduce the volume of Chinese insurers' overseas financing and investment, but it will help improve risk control and better regulate their overseas business.

"Using onshore assets as a guarantee to borrow money abroad had been a favorable means for insurers as many of them still face difficulties in financing for stock offerings or bond issuance," Zhu said.