- We ascribe the stock market's recent volatility to aggressive purchasing by a new breed of insurance company and the attempts by regulators to bring them under control.
- The China Securities Regulatory Commission (CSRC) weighed in at the weekend with a very public, and harshly worded, criticism from its chairman of these companies' behaviour. Aggressive purchases of listed firms, particularly state-owned enterprises (SOEs), have clearly touched a nerve.
- This again underlines the need for a regulator capable of better coordinating flows within the financial system, though there is no clear sign of this happening. Until tougher action is taken, expect regulatory moves to continue to have significant unintended consequences.
The chairman of the CSRC has launched a very public attack on aggressive stock purchases on the secondary market in recent months. Liu Shiyu, a former central bank deputy head, has accused this new breed of Chinese corporate raider of using illegal funds and morphing from "strangers at the gate to barbarians, and finally to industry thieves".
This is strongly worded stuff, triggering a 1.21 per cent fall in the Shanghai Composite Index on Dec. 5, and a 1.18 per cent drop in Shenzhen on the opening day of a mutual market access programme between Hong Kong and the southern city.
Mr Liu's comments follow those of Xiang Junbo, the chairman of the China Insurance Regulatory Commission, who has accused insurance managers of treating their companies like "automated teller machines" to make hostile moves on listed firms.
From strangers to barbarians and beyond
As we have noted, the most aggressive buyers in the A-share markets, such as Anbang Life, Foresea Life and Evergrande Life, have tended to be the aggressive sellers of universal life insurance products, short-term life policies that are very similar to wealth management products (see chart).
Although sales have slowed in the wake of an earlier CIRC crackdown (see chart), insurers have become more active in deploying the proceeds of these sales in the market.
The CSI 300 Index rose 8.8 per cent over the course of October and November, gains which have been primarily ascribed to large-scale purchases by these insurers (see chart).
Evergrande's stake in China Vanke rose to 14.1 per cent following purchases totalling Rmb26.3bn ($3.8bn) and it has been trading in the market frequently enough for the CSRC to speak with management in late November to make it clear it does not support these transactions.
At the same time, Anbang Life bought a 10 per cent stake in China State Construction, a leading SOE, and said it will continue to increase its stake in the near future. Foresea Life raised its stake in global air conditioning giant Gree Electric Appliances to 4.13 per cent by November 28, becoming the company's third biggest shareholder.
The CIRC has now reportedly ordered Foresea to suspend sales of universal life insurance products, but insurers have already raised a large cash pile from these sales and appear willing to go on putting it to work: universal life insurance premium sales this year stood at just over Rmb1tn by the end of October, up 73.7 per cent on the same period last year.
Authorities getting nervous
These insurance companies need to invest aggressively to match the generous returns offered by the products they have been selling. Slowing sales of these products will pose a challenge in the coming year. Maturing products will need to be rolled over and, if they cannot, then insurers will be forced to sell their newly acquired stakes.
Mr Liu's fiery comments suggest the authorities see this as a clear and present danger to market stability, but how they intend to regulate it is less clear, particularly given the increased interconnections resulting from the government's bailout of the stock market last summer.
Another argument for a super-regulator
We do not think Mr Liu's harangue marks an end to this battle. There is too much money involved and some of these insurance executives reportedly have better connections than their regulators. We expect continued ad hoc regulation, such as Foresea's suspension and the window guidance received by Evergrande. The CIRC may consider imposing caps on the stakes that insurers can hold in any one listed company.
Longer term, this situation again strengthens the case for a super-regulator to better coordinate the financial system. Mr Xiang must be pleased that his colleague at the CSRC has joined the fray, but this latest episode shows how the mismanagement and general lack of coordination surrounding the government's stock market interventions since last summer have carried into 2016. Mr Liu was only parachuted into the CSRC earlier this year after his predecessor was forced out for the agency's role in last summer's clumsy interventions.
A super-regulator, combining oversight of the banking, securities and insurance sectors, may not have been able to pre-empt the extraordinary recent behaviour of these insurers, but it would have stood a better chance of coordinating a rapid and effective response to manage it.
This article was first published on Dec. 6 by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.