Insurers Shy Away From Investing in Interbank Bonds

Interbank bonds are not appealing to insurers due to tight market controls put on by the regulators, said insurance executives at the Lujiazui Forum 2010 held over the weekend in Shanghai.

Investors are not interested in the interbank bonds, the business website of ifeng.com reported Saturday, citing Teng Wei, securities investment director with China Pacific Asset Management, an investment arm of China Pacific Insurance.

The majority of insurers' assets are invested in government and so-called enterprise bonds. For the first five months of the year, 52 percent of insurers' investments were in bonds. Bank deposits, various funds and equities accounted for the remaining amount, China Business reported Saturday.

Enterprise bonds are a financial tool issued by State-owned enterprises and subject to the approval of the National Development and Reform Commission (NDRC). Currently all enterprise bonds issued and traded on the interbank market have high AA credit ratings, leading to little variation of coupon rates, the bond's interest.

The lower the credit rating, the higher the returns because of the higher default risk.

The issuers with ratings lower than AA won't get the approval of the NDRC, said Xu Ximiao, a credit analyst of Dagong Global Credit Rating, one of the five domestically licensed rating agencies.

If they fail to get an AA rating, the enterprises are only allowed to issue commercial notes with shorter durations. But those notes still need a rating higher than A or A+ to get approval from the central bank for the issuance, Xu said.

In addition to the unwritten rating requirements for bond issuance, insurers are also prohibited from investing in bonds with ratings lower than AA, according to the China Insurance Regulatory Commission, he said. Unlike the US and European markets, high-yield bonds, or junk bonds, are not traded in China.

As the stock market continues to nosedive and bank deposit rates have fallen behind inflation, investors have become more interested in high-yield bonds.

Insurers currently hold 1.6 trillion yuan (234.26 billion U.S. dollars) of assets on the interbank bond market, making them the third largest group of bondholders after banks and the Ministry of Finance, Teng of Pacific Insurance said.

Out of the 350 billion yuan (51.24 billion U.S. dollars) in assets by end of last year, Pacific had 150-200 billion yuan (21.96 to 29.28 billion U.S. dollars) invested in enterprise bonds on the interbank market, he noted.