Unlike many countries where insurance firms are major investors in the capital market, China's insurance companies are still barred from trading stocks directly. They are allowed to invest no more than 15 percent of their assets in securities investment funds, and can buy government bonds and selected types of other bonds.

Nearly half of their little more than 1 trillion yuan (US$120 billion) of total assets at the end of May ended up in bank deposits, while only 65.2 billion yuan (US$7.9 billion) was invested in securities investment funds, latest official statistics indicated.

The narrow investment scope has impeded the growth of the nation's young insurance industry, which expanded by an average 30 percent during the past two decades, hampering insurance firms' repayment capacity.

China's life insurance companies face a huge burden of policies written in years of high interest rates, making investment yields crucial to their ability to settle claims.

Yet a string of interest rate cuts in the past few years and a bearish stock market have resulted in declining investment returns. Chinese insurers' average investment return dipped to 3.14 percent in 2002 from 4.3 percent in 2001. The figure for 2003 was not available, but was believed to be lower than the previous year due to weaker market sentiment.

Mindful of the unique role of indemnity funds in maintaining social stability, the authorities have been cautious in broadening the investment scope for insurance companies. But insurers say they are fully prepared for the long-awaited freedom.

All the 10 insurance companies surveyed earlier this month by the Shanghai Securities News newspaper said time is ripe for entering the stock market without securities investment funds. The majority of them said they were ready in terms of both personnel and technical preparations.

"It's fairly urgent because only one channel (to invest in stocks through securities investment funds) is not enough," said the chief operation officer of a major Chinese life insurer, who declined to be named.

Besides broadened investment channels, direct access to the stock market would also save insurance companies the huge management fees they pay to fund managers. Insurance companies are charged a minimum 1.8 percent management fee, which can translate into enormous numbers given their total investment through securities investment funds standing at 65.2 billion yuan (US$7.9 billion) at the end of May.

The expected policy relaxation will likely divert a huge chunk of funds from securities investment funds, which has worried many fund managers.

Insurance companies accounted for nearly 40 percent of the funds managed by equity-oriented investment funds in China at the end of last year, statistics indicated.

"Whether insurance companies will withdraw their money from investment funds to invest on their own or only put additional money in the stock market directly has a huge impact on the subscriptions and redemptions of open-ended funds," said Hu Lifeng, an analyst at China Galaxy Securities.

"In any event, relying too much on insurance companies will bring grave consequences to the fund management industry," he added.

Although the channel through securities investment funds is more costly and that fund managers, also facing many individual investors, often have strategies that do not meet the needs of insurers, the expertise of fund managers will still provide them much room after the policy relaxation, some insurers say.

"We surely will use both channels," said the chief operation officer at the life insurer. "They are complimentary rather than mutually exclusionary."

"I don't think there is going to be massive redemptions," he added.

Although insurance companies are increasingly reliant on their own asset management subsidiaries, smaller insurers, which find it difficult and costly to build their own investment teams, may choose to stay with fund management firms, analysts said.

China's largest property and life insurance companies both have set up their own asset management companies, and a few others have indicated plans to do so.

Equally or even more anxiously awaiting the policy relaxation are China's millions of stock investors.

The stock market is still struggling to recover from the chronic bearishness that resulted from an aborted plan to sell the untradable State holdings in listed companies some two years ago.

Uncertainties surrounding the State's ongoing macroeconomic maneuverings aimed at slowing expansive economic growth further pummelled market sentiment, with the benchmark Shanghai Composite Index falling below the psychologically important 1,400-point level late last month.

"People are just waiting on the sidelines," said Wang Yuanhong, a senior analyst with the State Information Centre.

The State's tightening measures resulted in a slowdown in bank loans in May, most noticeably in short-term loans and loans through commercial bills that have put liquidity pressure on many listed companies and securities firms.

"The market badly needs fresh liquidity like insurance funds," Wang said.

An earlier draft of the rules allowing insurance firms to invest directly in stocks put the ceiling of direct stock holdings at 5 percent of the insurers' total assets. That means insurance companies' direct stock investments can be as high as 50 billion yuan (US$6 billion).

The draft also contained risk control measures, requiring an insurance company's holdings in a single listed company to be no more than 10 percent of both the investor's total assets and the listed firm's total public shares.

Insurance companies are already showing a high level of risk awareness. Seven out of the 10 insurance firms surveyed by Shanghai Securities News said they wanted their direct stock investments to be no more than 5 percent of total assets.

Five companies expressed patience on building positions, saying they would look at market conditions first; seven showed preference for blue chips; six said their investment strategies are long term-oriented.

(China Daily July 12, 2004)