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Sep 2022

China: Handle with care

Source: Asia Insurance Review | Sep 2022

China seems to have been in the headlines more and more in recent months, and not always for the most positive reasons.
 
While the speaker of the US House of Representatives Nancy Pelosi’s visit to Taiwan caused more than newspaper hysteria, the travails of the insurance sector in China have also been making headlines of their own.
 
Last month we discovered that analysis by Huibao World suggested that the aggregate net profit of 61 unlisted life insurance companies in China stood at CNY4.1bn ($611m) for the first half of 2022, a fall of more than 80% compared to the CNY30.5bn reported for the corresponding period in 2021.
 
In almost the same breath, national reinsurer China Re went public with estimates that net profit of the group attributable to the equity shareholders of the parent company for the first half year of 2022 could be down by up to 50% compared to the corresponding period in the previous year.
 
Equally disturbing was the news that darling of the InsurTechs, ZhongAn Online P&C Insurance had forecast that it would record a net loss of CNY650-CNY750m for the first half of 2022, compared to an unaudited net profit of CNY604.1m for the corresponding half of 2021.
 
There has been no secret made of the troubles that the real estate sector in China is facing ever since the real extent of the financial difficulties facing Evergrande became public. The collapse of the sector is also causing distress for some of the nation’s biggest asset managers, privately-owned engineering and construction companies and smaller steel producers.
 
The growing distress of the real estate sector could leech further into the wider economy and cause lasting damage that goes far beyond hundreds of thousands of mortgage holders refusing to make their monthly repayments on long-stalled housing projects.
 
Nor has there been any hiding of the effects that China’s ‘dynamic COVID’ policy is having on the wider economy – and confidence levels. This policy is expected to continue to be implemented well into 2023, according to a Fitch Ratings report called APAC Exposure to Slower China Growth.
 
The agency forecasts that the Chinese economy will expand by 3.7% in 2022, down from a projected 4.8% at the start of the year. Fitch forecasts growth of 5.3% in 2023, which reflects a more subdued recovery from pandemic-driven disruptions than in 2021.
 
Further COVID-19-driven economic shocks in China could have negative economic effects on a range of APAC nations – including their insurance sectors – as China is the biggest export market for most. It is also an important supplier of intermediate products whose availability could be interrupted, affecting regional exports. Many Asian economies have a high degree of trade exposure, amplifying the effect on GDP, according to Fitch.
 
As if this was not enough, China seems to be embroiled in its first overseas debt crisis as the Belt and Road Initiative (BRI) seems to be falling foul of the structural macroeconomic unsoundness of developing nations in a post-COVID world.
 
According to calculations from the Rhodium Group, the total value of loans from Chinese entities to projects in BRI nations that had to be renegotiated in 2020 and 2021 reached $52bn. These renegotiations often amount to debt write-offs, deferments and a reduction in the interest charged on the loans.
 
None of this is to suggest that China will be adversely affected in the long run – and the nation is often admired for playing ‘the long game’. But the short and the medium term could prove to be a trial on a number of levels.
 
As the economist John Maynard Keynes famously said, “In the long run we are all dead.”
 
Paul McNamara
Editorial director
Asia Insurance Review
 
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