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May 2022

Insurers wary of China's teetering property market

Source: Asia Insurance Review | May 2022

To achieve its target of developing subsidised rental housing for its large population, China has to garner support not only from the country’s real estate sector but also from major investors like banks and insurers. Insurers may not help the government to achieve its target
By Anoop Khanna
 
 
Following the debt-strapped woes of the Evergrande Group and the subsequent destabilisation of the real estate market, the Chinese property sector is proving to have lost its lustre for many categories of investors.
 
China’s central government has taken up the development of subsidised rental housing as one of its priorities for the year 2022. Its target is to develop 2.4m units of government-subsidised rental homes across the country during the current year. This should increase the supply of affordable rental housing and resolve housing difficulties to some extent. The country will also add another 100,000 public rental houses and renovate 1.2m houses in rundown areas.
 
To complete this task, China is seeking the support of its banking and insurance industries. To facilitate the banking and insurance industry to support this effort, the China Banking and Insurance Regulatory Commission (CBIRC) and the country’s ministry of housing and urban-rural development published a set of guiding opinions in February 2022.
 
Government seeking targeted financial products
These guiding opinions have been issued to strengthen the financial support for the construction and operation of government-subsidised rental housing and require the banking and insurance institutions to provide targeted financial products based on the characteristics of the financing needs of government subsidised rental housing.
 
The guiding opinions propose to build a multi-tiered and wide-ranging financial service system for government-subsidised rental housing projects on a people-centred and market-oriented basis, and with controllable risks and viable business models.
 
The real estate industry considers the guiding opinions to be an important measure to promote the establishment of a housing system with multiple types of suppliers and diverse supporting channels that encourages both rental and purchase, so as to alleviate the difficulties in housing for new urban residents and young people.
 
Regulations to be relaxed
The CBIRC also said in a statement that insurers should provide long-term financing support to affordable housing projects. To make things convenient for the financial institutions, which include insurance companies, the affordable rental housing loans would not be included in the management system that sets caps on real estate loans.
 
China, in its efforts to manage the risks for its financial systems, has imposed upper limits on outstanding real estate loans and mortgages for lenders from 1 January 2021.
 
The CBIRC and the ministry of housing and urban-rural development will also jointly promote the implementation of relevant measures, form synergy to support the development of government-subsidised rental housing and promote the virtuous cycle and healthy development of the real estate sector.
 
The local authorities are also required to clarify the standards of government subsidised rental housing projects as soon as possible, strengthen the monitoring and management of the projects, and provide support for banking and insurance institutions to carry out relevant business. At the same time, the guiding opinions emphasise that parties concerned should strengthen project risk management, and firmly guard against risks.
 
The guiding opinions encourage insurers to provide long-term financial support for affordable rental-housing projects through direct investment or by investing in debt schemes, equity investment plans and insurance private-equity funds. The regulator also wants the insurers to invest in infrastructure real-estate investment trusts and bonds that are used to finance housing projects.
 
Not an encouraging response
It does not look likely that what is on offer will be sufficient to bring the insurers to the table. Fitch Ratings in a non-rating action commentary ‘Chinese Insurers Unlikely to Invest in Property Despite Regulatory Push’ published in March 2022 said, “It does not expect Chinese insurers significantly to increase their exposure to real-estate related investments and support the development of government-subsidised rental housing despite a possible improvement in asset-liability duration mismatches.”
 
Fitch believes insurers are exercising greater caution in their investment decisions under Phase 2 of China’s Risk-Oriented Solvency System (C-ROSS), which took effect from 1 January 2022, and has tighter capital requirements on high-risk assets, including investment properties, alternative investments and long-term equities. These assets accounted for half of the insurance industry’s investment mix at end-2021.
 
The Phase 2 regime subjects insurers’ direct and indirect real-estate exposures to higher capital charges and adds a concentration risk factor to the minimum capital requirement if the book value of an insurer’s total investment properties exceeds 25% of total assets to reflect property price volatility risk.
 
The C-ROSS regime also increases the risk-charge multiple factor for investment properties that are located outside municipalities that fall directly under the central government, provincial capital cities or cities under state planning.
 
The industry’s direct real-estate investments are generally limited, but insurers have exposure to the property sector through equity and alternative investments with property as underlying assets.
 
Defaulting developers a dampener
Financial distress among Chinese property developers had also become more apparent in the last quarter of 2021, as several developers defaulted on bond or interest payments. The debt crisis had prompted CBIRC into conducting probes into the investment activities of insurers, particularly those beyond the insurers’ allowed investment scope.
 
The regulator is looking into insurers’ role in commercial real estate projects and unlisted property developers. Insurers were also directed to submit details of their real estate investments, whether in the form of bonds, shares, or other vehicles.
 
In an earlier commentary Fitch Ratings had found that all rated insurers’ investment risk associated with Chinese home builders was manageable and their portfolio’s average exposure to property developers, excluding via debt investment schemes, was less than 7% of total equity and 2% of total cash and invested assets at the end of first half year of 2021.
 
Fitch has said the investment risk of life insurers in China associated with home-builders (excluding debt investment schemes) is expected to be manageable as the insurers have adequate capital to absorb potential losses. For all rated life insurers, the portfolio average investment exposure related to non-investment-grade home-builders and those are not rated by Fitch was equivalent to less than 10% of total equity at end of first half of 2021.
 
In the non-life sector, Fitch expects general insurers’ investment risk associated with Chinese home-builders also to be manageable. Fitch believes rated insurers have a sufficient capital buffer to withstand potential asset shocks from the Chinese homebuilding sector, based on statistics on investment exposure to home-builders provided by its rated insurers.
 
Regulatory probes a killjoy
Probes like the one in August 2021 by CBIRC into the investments in the property market by Ping An Insurance Group have also dampened the spirits. CBIRC had asked the insurer to stop selling alternative investment products, which are typically tied to the property market. According to a report by Reuters, Ping An’s performance in recent quarters has been jittery over concerns about its exposure to the country’s real estate sector, which has not been too healthy in recent times. This has impacted the insurer to a large extent. A 
 
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