|Patricia Cheng put out a 119-page report entitled ‘Le nouveau riche – |
Mismatch fuels shopping frenzy’
The long-awaited launch of Shenzhen-Hong Kong Stock Connect has coincided with an increasingly troubled attitude towards the very flows it is designed to enable.
The new trading link, launched on December 5 two years after the Shanghai-Hong Kong Stock Connect initiative, allows foreign investors access to 881 local mainland stocks. But it was a limp debut, with first-day inbound volumes of Rmb2.67 billion ($390 million), one fifth of the daily quota available, in sharp contrast to the opening day of the Shanghai link, which hit Rmb13 billion and exhausted the quota within the first session.
Crucially, the link works both ways, allowing Chinese investors to buy stocks listed in Hong Kong, and in this respect it falls at an interesting time for capital flows.
China has already sought to clamp down on outbound M&A because of fears over the volumes of money leaving the country. The National Development and Reform Commission, Ministry of Finance, People’s Bank of China and State Administration of Foreign Exchange have published a document confirming new oversight of outbound financial flows, describing the supervision of some outbound deals as having been “irrational”.
So a new method of capital flight seems ill-timed on the face of it. HSBC estimates as much as $29 billion of outflows from China every year could move through mechanisms such as Stock Connect – although Connect is rather different from some other channels since users can only cash out in the currency they started with, making it more of a loop than a channel for capital flight.
From strangers to thieves
Nevertheless, it comes at a lively and introspective time for Chinese regulators. Just days after the launch of the new mechanism, the chairman of the China Securities Regulatory Commission, Liu Shiyu, attacked the investment behaviour of the country’s insurance industry in an extraordinarily vigorous commentary. Liu said insurers had gone from being: “Strangers at the gate to barbarians and finally to industry thieves.”
What prompted such an attack? Domestically, insurers have been increasingly aggressive buyers of listed companies and state-owned enterprises in particular. Internationally, they have made a name for themselves with bold and brazen outbound bids, not all of which stay the course. The regulator responsible for insurers, Xiang Junbo at the China Insurance Regulatory Commission, has accused insurance CEOs of using their companies as “automated teller machines” to buy up stock and gain outright control of other companies.
Twisting Warren Buffett’s float philosophy, they promise generous payouts to policyholders to lure inflows … [Insurers] have flipped asset-liability matching upside down
- Patricia Cheng, CLSA
Insurers have been capturing the attention of the industry for a while. In September CLSA analyst Patricia Cheng put out a 119-page report entitled ‘Le nouveau riche – Mismatch fuels shopping frenzy’. This followed a series of aggressive international purchases by Chinese insurers – most notably Anbang, which by then had bought the Waldorf Astoria in New York and made a controversial bid for Starwood Hotels & Resorts from which it subsequently withdrew.
“Twisting Warren Buffett’s float philosophy, they promise generous payouts to policyholders to lure inflows,” she wrote. “These emerging companies fully embrace the asset-driven model – identifying investments, then selling insurance to get the cash needed to buy them. They have flipped asset-liability matching upside down.”
Anbang is the most famous, but a newer insurer, Qianhai, barely four years old, is making even bigger waves at home, becoming the largest shareholder in property developer Vanke and leveraging itself to make further on investments.
“The wager,” Cheng says, “is on liquidity, with which they can fund their ambitions and become too big to fail, or at least too big for regulators to take any drastic actions against.”
Domestically, Anbang, Foresea and Evergrande have been particularly aggressive buyers in the A-share markets and equally aggressive sellers of universal life insurance products, which look like wealth management products but have a life insurance element attached to them.
Regulators are worried about these, seeing them as short-term investment products rather than anything with the inherent conservatism that life insurance is meant to represent. The returns they promise investors can only be maintained through risky stock purchases, which also alarms regulators worried the whole set-up cannot last.
In a first sign of action, CIRC has now banned Foresea from selling new universal life insurance products after it failed to meet new requirements implemented earlier in the year.
These two stories – Shenzhen Connect and Chinese insurers – fit together because one is likely to be a lively user of the other. Mainland insurance firms have a 15% cap on their overseas allocation, but Hong Kong equities bought through the Connect system do not count towards it. If their domestic aggression is anything to go by, then they are likely to use any new system to deploy capital into new areas.
It would be a lot easier to predict what comes next if China’s proposed super-regulator came into being. The activity of insurers necessarily puts them under the remit of two regulators, the CSRC (for securities) and CIRC (for insurance); it would be much easier to coordinate policy on how to keep them in check if the regulators were merged. Many people want to see it, both in China and beyond.