CHINA'S NEW INSURANCE EQUITY REGULATIONS KEEP SPECULATIVE CAPITAL AT BAY

The China Insurance Regulatory Commission unveiled its third draft of Administrative Regulations on Equities in Insurance Companies on Monday.

The new regulations on insurance equity will help to keep speculative capital away from China's insurance industry, say analysts.

The insurance regulator published its first and second drafts for public comment in August 2007 and March 2008. Compared to the second draft, the third, which the public may comment on until September 18, lays out stricter rules on changing insurance companies' shareholders.

It provides that if an insurance company wants to replace a shareholder owning more than five per cent of its total shares or total capital, the regulator's approval is necessary. The proportion was more than 10 per cent in the previous draft.

"It is believed that the rewrite is aimed at preventing frequent shareholders changes of insurance companies that may affect the continuity of their business," an executive with a Chinese state-owned insurance enterprise pointed out.

As some small shareholders of insurance companies have been speculating for short-term profits, Chinese insurance companies have seen a rapid turnover of management due to frequent equity transactions. "After the release of the third draft, it will become difficult for small shareholders to speculate with insurance equity", said the executive.

The new regulations also introduce stricter requirements for shareholding and related transactions of insurance shareholders.

It says that shareholders taking more than 15 per cent of the equity of an insurance company or those taking less than 15 per cent equity but having direct or indirect control of an insurance company should satisfy three conditions. These include making a profit in three consecutive fiscal years; net assets of no less than 200 million yuan (US$29.3 million); and good reputation in the industry.

The third draft, like the previous ones, still bans the use of bank loans as capital for equity investments in insurance firms. It also stipulates that a single investor, including its related parties, may hold no more than one fifth of the share capital of an insurance company.

However, the third draft deletes the proposed regulation "foreign financial institutions that already have been approved to invest in China's insurance market should not have share participation in other insurance companies of the same type", found in the second draft.

With this change of tack, the regulatory commission's insurance supervision department has eased the controls on foreign capital investing in Chinese insurers. It becomes possible for foreign financial companies to own two insurance companies operating in the same market in China.

In spite of this, analysts point out that as most foreign shareholders in China's domestic insurers have suffered losses during the international financial turmoil, foreign investors are unlikely to want to invest in a second Chinese insurer at the present time.