China's Insurance Regulator May Get a Hostile Takeover

(Bloomberg Gadfly) -- With top Communist Party officials gathering in Beijing to set key government posts, the insurance regulator is looking like the weakest link.

China is considering a merger of its banking and insurance watchdogs to streamline the fragmented regulatory system, as Bloomberg News reported in late January. A combination could be announced soon after the National People's Congress, which starts next week. An alternative plan is to create a super-regulator, also including the People's Bank of China and the stock-market oversight body.

"Merger" can be a polite term for an acquisition, and that may be the outcome here: The China Insurance Regulatory Commission, headless since its boss was investigated for corruption in April, stands on the wrong side of the nation's top economic priority.

Beijing can now accuse the CIRC of lax regulation, even of fostering systemic risk in the fragile banking industry. Exhibit A is Anbang Insurance Group Co., which aggressively bought bank shares in public markets, then used its sway over those institutions to distribute even more savings products. In its prime, Anbang was China's third-largest insurer, selling as much as 87 percent of its offerings through banks and exposing them to credit risk. State-owned China Life Insurance Co., by contrast, relied on the traditional agency model.

Now Anbang is a mess. It's been seized by the state, and Chairman Wu Xiaohui, who married one of Deng Xiaoping's granddaughters, is in jail. Another of Anbang's original stakeholders, Chen Xiaolu -- son of Marshal Chen Yi, a key figure in the birth of the People's Republic -- died of a heart attack Wednesday night. Assets ranging from New York's Waldorf Astoria hotel to stakes in banks such as China Minsheng Banking Corp. may be for sale.

Even if President Xi Jinping forgives the gaps in CIRC oversight, the agency doesn't have the balance sheet to unwind Anbang. Insurers are required to contribute to the China Insurance Security Fund, which provides emergency liquidity in the event of bankruptcy. As of the end of July, the latest data available, the fund had a little more than 100 billion yuan ($15.8 billion), a fraction of the policies Anbang has written. 

But look on the positive side: Direct control of a cash-rich industry by a super-regulator would help with an orderly unwinding of China's massive pile of corporate debt.

Beijing is nervous about a bond sell-off. Since the Communist Party Congress in October 2017, when deleveraging was made an economic priority, domestic yields have been climbing. In the month after that meeting, the 10-year government yield soared 30 basis points, topping 4 percent for the first time since 2014. 

Now, to calm traders, China plans to cut its budget deficit target to 2.9 percent of GDP, the first reduction since 2012. It also plans to curb the $1 trillion money-market funds industry by capping the amount investors can redeem in a day. (Savers were quick to ditch bonds and rush into money markets. Interest rates offered by the world's largest such fund, Yu'E Bao, run by Alibaba Group Holding Ltd. affiliate Ant Financial, are now more attractive than Ministry of Finance bonds.)

This is where insurers can help. Their fast-growing investment portfolios now amount to 15 percent of China's GDP. Of those holdings, 35 percent is in bonds, according to CIRC data.

In other words, if there's a bond rout, whether it's triggered by local government financing vehicles retiring debt or by global jitters, a super-regulator could round up insurance companies for some national service.

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

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

To contact the author of this story: Shuli Ren in Hong Kong at sren38@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

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