Chinese Watchdogs Cap Insurers’ Onshore-Backed Overseas Financing

Chinese Watchdogs Cap Insurers’ Onshore-Backed Overseas Financing

Xu Wei

Date: Tue, 02/13/2018 - 11:13 / source:Yicai
Chinese Watchdogs Cap Insurers’ Onshore-Backed Overseas Financing
Chinese Watchdogs Cap Insurers’ Onshore-Backed Overseas Financing

(Yicai Global) Feb. 13 -- Two Chinese regulators have paired up to limit insurance companies' onshore-backed offshore financing to ensure sustained and healthy development of the sector and guard against the risks of overseas investment.

The practice involves a company pledging domestic assets as collateral to obtain loans abroad via a special purpose company, one which the insurer sets up or holds at least a 95-percent stake in, according to a joint notice published on social media by the China Insurance Regulatory Commission and the State Administration of Foreign Exchange.

Onshore-backed overseas financing helped insurers expand outside China, but created liquidity problems and increased leverage ratios and the risk of borrowing, the regulators said. China has been battling to prevent companies’ “irrational” spending abroad for over a year and restricted overseas investments in hotels, property, films, sports and entertainment in August.

Insurers may not obtain onshore-backed financing for overseas firms other than special purpose companies, the Jan. 5 notice added. Outstanding loans borrowed via the practice must not exceed 20 percent of net assets as of the end of the previous quarter, and will be subject to leverage ratio management.

An SPC will need to obtain approval from the Insurance Asset Management Association of China if it plans to secure a loan of more than USD50 million or equivalent through an onshore-backed deal.

The notice laid out a number of other rules for the practice:
- Projects and their underlying assets must not violate China’s macro-regulatory, industrial or outbound investment policies
- Insurers may not use borrowed money for anything other than SPC investments
- Insurers may not lend the funds to third parties
- Insurers may not use the practice to obtain credit abroad, conduct arbitrage or make illegal speculative transactions

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Keywords: SAFE, CIRC