[photopress:propertyChina.jpg,full,alignright]A law that which will enable insurance companies to invest in real estate, will go public as early as the end of next year. This will not be helpful to the government in its efforts to hold down real estate prices.
The current insurance law dates back to 1995 although it was updated in 2002. The argument seems to be that due to the skyrocketing development of China’s insurance sector, which has seen an average annual growth of 30 per cent over the past two decades, the original insurance law lags far behind the times.
Yang Huabai, director of the legislation department of the China Insurance Regulatory Commission (CIRC) said: ‘One of the major problems is with investment channels.’
You should take a deep breath before the next bit.
China’s Insurance companies held a combined RMB1.85 trillion yuan ($236.5 billion) of assets as of October 31 which is up a massive 25 per cent on last year.
However, the law, as it stands, supplies very firm guidelines on what that money can and cannot be invested in. So at the moment the return on investment is a very, very low 3 per cent which is not what is happening in real estate.
Although the CIRC has taken measures to open investment channels, such as allowing some insurers to pour money into infrastructure projects and buy stakes in banks, these moves are not yet law. But Yang Huabai said, ‘As a major change, insurers can invest in real estate in the revised draft.’
This is understandable from the point of view of the insurance companies but looking at the real estate market as a whole it will do nothing to stop the overheating.
Some insurance companies have already started pilot programs in the property sector.
Li Yanhua, chief risks officer at Taikang Life Insurance, told China Daily, ‘We have bought several commercial buildings this year and will further strengthen our investment in this sector, including in medium-sized cities.’ We are talking about the fifth largest life insurer in China.
And he is very seriously keen on real estate projects because it fits the needs of insurance companies whose liabilities are mostly long-term.
Li Yanhua said, ‘My confidence in China’s real estate sector is based on the country’s growing economy and limited land supply, especially in hot areas.’
Which puts the government between a rock and a hard place.
On the one hand it wants to hose down the real estate market. On the other it is plainly not in the interests of insurance companies to keep them out of a market which is practically designed for them.
Luckily there is some time to buffer the effects as it seems unlikely the law will be in effect until the end of next year. Under the 11th Five-year Plan, China’s insurance revenue is expected to exceed RMB1 trillion yuan ($128 billion) by the end of 2010, and insurance assets are expected to hit RMB5trillion ($639 billion). And a lot of that may well be in real estate.