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Moody's: China insurers holding more traditional assets amid regulatory scrutiny

Chinese insurers are increasing traditional assets such as bank deposits and equity funds in their portfolios amid the government's clampdown on financial system risks, Moody's Investors Service said.

The country's insurers held 13.09% of their investable assets in bank deposits and 12.66% in equity and investment funds as of end-July, up from 12.92% and 12.30% as of end-2017, respectively, according to data from China Banking and Insurance Regulatory Commission. Bond holdings dropped marginally to 34.32% from 34.59% of the mix. The industry's investable assets totaled 15.698 trillion yuan as of end-July.

Meanwhile, nontraditional assets such as asset-backed securities and other alternative investments took up 38.83% of the industry's portfolio as of end-July, down from its recent peak of 40.19% at the end of 2017.

"Overall, the allocation to alternative investments is slowing down," Zhu Qian, vice president and senior credit officer at Moody's Investors Service, said at a Sept. 7 press conference in Hong Kong.

The yields on alternative investments such as infrastructure projects, asset-backed securities and debts are usually higher than traditional and fixed income assets, but the risks are also higher.

In September 2017, the Chinese insurance regulator said insurers needed to strengthen their management of risks arising from investing in alternative assets.

In January, Chinese regulators encouraged insurers to invest in local governments' infrastructure projects and participate in public-private partnerships to support economic growth. But the regulators added that insurers cannot ask for fixed returns or guarantees.

"You can invest more in those infrastructure projects but in a more transparent and direct way, instead of in the old days, you used funky, complicated and multi-layered stuffs, which are very difficult to identify the true risk exposure," Zhu added.

Declining returns from alternative investments and higher interest rates offered by other financial products are other reasons why Chinese insurers shift towards less-risky assets.

"What we have seen in the past few years is that these alternative investments could have been providing like 7% to 8% of investment yields and recently we have seen more of those alternative investments giving 5% to 6% of yields," Sally Yim, associate manager director at Moody's Investors Service, said at the same conference.

As of Sept. 6, US$1 was equivalent to 6.84 Chinese yuan.