AIA Caught in Beijing's Crosshairs

(Bloomberg Gadfly) -- It was nice while it lasted.

For a market so small, Hong Kong's 7-million-strong population has an inordinate amount of influence on AIA Group Ltd.'s insurance sales.

That vulnerability has been cast into the spotlight after Beijing clamped down on one of the firm's biggest growth areas -- sales of U.S. or Hong Kong dollar-denominated policies that have savings elements attractive to mainland Chinese keen to escape the falling yuan.

Insurance brokers familiar with the matter said Friday that the use of China UnionPay Co. credit and debit cards to buy such products will be suspended, other than for accident and medical coverage. A unit of UnionPay later outlined its guidance on payment on its website, reiterating the use of its cards by mainland Chinese is prohibited, except for accident, medical coverage and tourism consumption.

Shares of AIA were hit Monday, tumbling as much as 7.2 percent. Prudential Plc, which also conducts a fair amount of business in Hong Kong, declined as much as 3 percent. Its London-listed securities finished the week down 1.2 percent.

China stopped short of an outright ban earlier this year, when the State Administration of Foreign Exchange capped the use of UnionPay bankcards for the purchase of insurance products overseas at $5,000. Many people got around that by swiping their plastic more than once, however.

 AIA Group shares, intraday

-7.2%

This latest move means it will be much harder to get yuan out of China for those hoping to buy policies over $50,000, the maximum that can be converted each year. One way would be to use offshore savings or international credit cards linked to Hong Kong bank accounts to buy the insurance instead, according to Daiwa Capital Markets Hong Kong Ltd. analyst Leon Qi.

For its part, Prudential, which listed in Hong Kong a few years back as part of its Asian growth push, is more exposed to the U.S., where it derives almost half its revenue. But the city accounted for 42 percent of AIA's annualized net premiums, or new business sales, in the first half, up from 30 percent in the same period last year.

As much as 15 percent of AIA's total sales in the six months to June were from mainland Chinese, and analysts at Sanford C. Bernstein & Co. estimate that a full implementation of the UnionPay ban could reduce Hong Kong sales in 2017 by 30 percent to $1.3 billion, implying a 10 percent reduction to its current 2017 group sales forecast to $4.7 billion.

AIA is doing well in other markets such as Malaysia and also in different areas in China, where its high margin, critical-illness coverage is popular. Mainlanders have other ways of getting their money out, too, as the continued buying of real estate offshore shows.

But the clampdown highlights that companies whose revenue gains hinge on capital outflows from China will always be in Beijing's crosshairs. AIA's share-price rout may have some legs left yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.