In a reversal of its protectionist policies China plans to ease restrictions on foreign ownership of financial institutions, opening up vast opportunities for global reinsurers to enter the world’s fastest-growing life insurance market.
The Chinese State Council has committed to relax or end limits on foreign participation in commercial banking, distressed-asset management, securities trading, broking, and insurance.
The full scope of the sector’s liberalisation is awaiting official release.
Insurers, fund managers and securities firms are expected to attract more foreign capital and interest if the promised deregulation moves forward quickly.
Life insurance and non bank financial institutions sectors stand to gain from China’s decision to ease restrictions on foreign ownership of financial institutions, according to S&P Global Ratings.
“We believe foreign investors will have significant interest in acquiring small and midsize domestic Chinese financial firms or gaining control over existing joint ventures,” said S&P Global Ratings analyst Eunice Tan.
“In our view, some may also seek access through establishing wholly owned subsidiaries,” Tan added.
Under current protectionist regulation, foreigners have been prohibited from owning majority stakes in Chinese financial sector companies.
Now these restrictions on banks and distressed-asset managers could be fully lifted and thresholds for investing in securities firms, fund managers, and insurers will be gradually phased out over the next few years.
S&P analysts believe the Chinese government’s decision to reverse the protectionist regulation surrounding its financial system could be an attempt to strengthen its financial resilience.
Opening the playing field to foreign competitors and increasing competition could improve best practices in governance, risk management, and operations.
However, it’s unlikely further internationalisation will displace domestic leaders; “Chinese financial institutions have a large lead and will continue to enjoy a home-field advantage.
“Foreign entrants will still rely on domestic franchise for access to customers and local knowledge. Moreover, domestic partners in existing joint ventures with international firms may be unwilling to dilute their stakes,” said Tan.
“We expect that openings in China’s insurance sector will attract the most foreign interest, in part because international investors will be advancing from a lower base. The 28 foreign-invested life insurance companies accounted for around 6.5% of the gross premiums written as of August 2017 (2016: 6.3%).
“The Chinese insurance sector’s risk management remains in the developing stage, and thus would benefit from a greater influx of overseas practices and professional personnel,” S&P explained.
Differences in risk management and investment appetite can slow management cooperation and efficiency at Sino-foreign joint ventures and some foreign insurers have been scaling back on investments over the past few years.
However, Tan explained that this could now change as “once foreign insurers have the scope to take controlling stakes, they will have a bigger say in areas of business strategy and risk governance. This could waylay earlier concerns around unaligned interests among shareholders in domestic-international joint ventures.”
S&P believes foreigners will have less scope or interest in competing with or investing in China’s major commercial banks, however, “the prospect of eventual control should incentivize global insurers to make more meaningful inroads into the world’s fastest-growing insurance market.”
With China being the most significant re/insurance growth market due to its “economic miracle” driving the growth of a giant middle class population, the roadblocks ahead of global reinsurers looking for a piece of the Chinese pie have so far been dauntingly full of protectionist policies.
However, in coming years, reinsurers could gain significant headway into the Chinese market through enhanced ownership and partnerships with Chinese insurers – this would in turn create a more diverse and thus resilient global network to spread the risk of China’s development.
