China Insurance Regulatory Commission (CIRC) issued the Interim Measures on the Administration of Overseas Investments of Insurance Funds (the Interim Measures) in 2007 to establish a basic legal framework for China's domestic insurance sector to make offshore investments.
On 12 October 2012, CIRC released the Implementing Rules for the Interim Measures (the Implementing Rules). The 35-article Implementing Rules expand the asset categories and jurisdictions in which Chinese insurers can invest offshore, and provide detailed requirements for such areas as investor qualifications, risk control, and the supervision and administration of the offshore investments of insurance funds.
Offshore investments under the Interim Measures were, in practice, limited to investments in Hong Kong. The Implementing Rules specify a list of 45 countries and regions, including 25 developed economies and 20 emerging economies ("Permitted Jurisdictions") where domestic insurance companies may make overseas investments.
Click here for the list of Permitted Jurisdictions.
Expanded Asset Classes
The Interim Measures permit Chinese insurance companies to invest in certain types of offshore capital market products and fixed income products. The most noticeable change under the Implementing Rules is that overseas investments in private equity and real estate are currently allowed. The expanded asset classes include:
Chinese insurance funds may invest offshore in (i) publicly traded securities such as common stocks, preferred stocks, ADRs and GDRs; and (ii) equity of private companies.
The offshore private companies in which the PRC insurance companies may directly invest are limited to those in the finance, elderly care, healthcare, energy, resources, automobile services and modern agriculture industries.
2. Real Estate
Direct investments by PRC domestic insurance funds in offshore real estate are limited to mature commercial properties and office buildings with stable incomes, which are located in the central areas in the main cities of the developed countries on the Permitted Jurisdictions list.
3. Currency Products
This asset class includes currency market products such as short-term commercial notes, bank notes, certificates of deposit and reverse repurchase agreements, from issuers with a credit rating of no less than "A".
4. Fixed Income Products
This asset class refers to bank deposits, government bonds, corporate bonds and other fixed income products. The products and their issuers should both be rated no less than "BBB" unless the bonds are issued by the Chinese government overseas.
Investments in Offshore Funds
The Implementing Rules permit Chinese insurance companies to invest in the following three types of offshore fund when certain conditions are satisfied.
1. Securities Investment Funds
Chinese insurance companies may invest in offshore securities investment funds duly recognized by the securities supervision authority of, or registered in, one of the Permitted Jurisdictions, with at least three years' operating history. The fund managers should meet certain asset management and net asset requirements, while the funds' investments should fall into the currency, fixed income and equity product categories as described above.
2. Equity Investment Funds
The PRC domestic insurance companies may invest in offshore private equity funds, subject to certain requirements.
The private equity funds invest in portfolio companies that are in the growth period, mature period or have high investment value, and are not subject to the limitations of the Permitted Jurisdictions.
The offshore private equity fund should have a commitment amount of not less than US$300 million or an equal amount in freely convertible currencies.
The Implementing Rules detail certain requirements that the investment team of the offshore private equity fund must satisfy, including the number of investment professionals, years of industry experience, minimum number of investments and exits, and corporate governance and incentive schemes.
Requirements of the Fund Manager
The Implementing Rules explicitly state the qualifications of the fund managers raising and managing the offshore private equity funds:
The fund manager's paid-up capital or net asset should be no less than US$15 million or an equal amount in freely convertible currencies;
The fund manager's cumulative assets under management should be no less than US$1 billion or an equal amount in freely convertible currencies; and
The fund manager should have a good track record and reputation.
Chinese insurers are also allowed to invest in offshore fund of funds (FOFs) which target the private equity funds in compliance with the aforesaid requirements. The FOFs should not invest in other FOFs.
3. Real Estate Investment Trusts (REITs)
The REITs should be listed and traded at the exchanges in the Permitted Jurisdictions.
It remains unchanged that the total offshore investments by the PRC insurance institutions should not exceed 15% of their total assets by the end of the previous year. The Implementing Rules further provide that the total investments in the 20 emerging market jurisdictions should not exceed 10% of their total assets by the end of the previous year.
It is expected that the Implementing Rules may further facilitate offshore investments by PRC insurance companies, in particular, investments in offshore private equity funds.