The China Insurance Regulatory Commission (CIRC) now permits those insurance companies which are subject to its regulation to diversify their investments into the private equity and real estate sectors pursuant to the "Interim Measures for the Administration of Utilisation of Insurance Funds", effective 31 August 2010.

The CIRC has also issued the "Interim Measures on Investment of Insurance Funds in Equity" (PE Regulations) and "Interim Measures on Investment of Insurance Funds in Real Estate" (RE Regulations), effective 5 September 2010, which provide more detailed guidelines.

PE Regulations

The PE Regulations permit an insurance company, subject to meeting certain qualification requirements, to invest in limited industry sectors:

  • up to 5% of total assets in direct equity investments in unlisted companies
  • up to 4% of total assets in private equity funds (the aggregate of all such investments cannot exceed 5% of total assets)

An insurance company cannot utilise leverage in making such investments.

The PE Regulations prescribe restrictions on the type (and growth stage) of companies or private funds in which an insurance company can invest. Direct equity investments by an insurance company are limited to investments in other insurance companies, finance companies, facilities for the elderly, or hospitals that are related to insurance industry. For investments in private equity funds, an insurance company is prohibited from investing in venture capital funds. An insurance company is not permitted to set up a private fund or fund management company itself.

The PE Regulations also require an insurance company to analyse and monitor the investment activities of private equity funds in which it invests and to ensure appropriate corporate governance mechanisms are in place.

RE Regulations

The RE Regulations provide that an insurance company, subject to meeting certain qualification requirements, can invest:

  • up to 10% of total assets in real estate
  • up to 3% of total assets in real estate related financial products e.g. a real estate fund (the aggregate of all such investments cannot exceed 10% of total assets)

An insurance company cannot utilise leverage in making such investments.

An insurance company may invest in commercial real estate (the term is not clearly defined), office buildings, housing for the elderly and hospitals, but it cannot invest in residential property, develop real estate, or set up, invest in or own real estate development companies. The RE Regulations also contain a set of certification requirements for the real estate projects that an insurance company may invest in. The RE Regulations permit an insurance company to invest in real estate related financial products, but the procedures for such investments will be subject to separate guidelines to be promulgated by the CIRC.

Both regulations permit investment management companies to manage, or offer investment products for, insurance companies' private equity or real estate investments. The regulations contain slightly different qualification requirements for such management companies, which include, among others, registration under PRC law, registered capital requirement, asset under management requirement and investment personnel and qualification requirements.

Conclusion

The growth and development of RMB funds in China has been significantly hampered by the scarcity of sophisticated PRC institutional investors. PRC insurance companies have long been considered to fill such a role. The regulations represent an important first step in opening the door for insurance companies to participate in investments in private equity and real estate funds in China. They are also expected to, over time, further stimulate the growth of RMB funds.