Buying Enterprise Bonds: The CIRC Relaxes the Rules

The scope of purchasable bonds is now wider. Previously, insurance companies could only purchase central enterprise bonds relating to some infrastructure projects, such as railways and power facilities, the issuance of which had been approved by ministerial-level departments and which had a credit rating of at least AA+. The Procedures have eliminated the limitations on the issuers and have eased the credit rating requirements as well; insurance companies can purchase any enterprise bonds rated at least AA. Notably, at present there are only two credit rating institutions that are certified by the CIRC to rate enterprise bonds, although more may be certified in the near future.

Another important change is that the ratio of all purchased bonds to total assets is now higher. In the past the CIRC allowed a company to hold a balance of its purchased enterprise bonds in an aggregate not exceeding 10% of its total assets. Furthermore, the bonds held by it in any phase could not exceed 10% of the bonds issued in that phase, or 2% of its total assets, whichever was lower. Now, according to the Procedures the aggregate bonds held by a company, if calculated at cost, may not exceed 20% of its total assets in the last month. Also an insurance company's holding of corporate bonds of the same type in the same issue cannot exceed 15% of the bonds of that class issued in that phase, or 2% of its total assets in the prior month, whichever is lower.

The Procedures clarify that companies offering investment-linked insurance may establish investment accounts that can invest up to 100% of total assets in the account in corporate bonds. For wan neng life insurance (literally meaning "universal" insurance), the limit is 80% of the total assets in the account.

All of these revisions will have a positive impact on the operation of insurance companies, while the capital so injected will boost the development of China's depressed bond market. Nevertheless, companies should not be too optimistic - statistics show that the total sum of enterprise bonds issued each year is a fairly small figure vis a vis their available funds. Furthermore they are unlikely to be the sole buyers of all enterprise bonds. Therefore, liberalizing the rules for purchasing enterprise bonds is just the first step, and the CIRC needs to further open other forbidden or restricted areas. With reference to existing PRC laws, the wording of both the PRC Insurance Law and the Insurance Companies Administration Provisions published by the CIRC, although apparently stringent, are flexible in practice. The State Council is vested with the power to decide how insurance companies may utilize their funds, provided that their decisions shall comply with the principles of safety and stability. There is no legal barrier for the CIRC to adjust the companies' investment channels, as it is the authority under the State Council that is in charge of China's insurance sector. On the other hand, the legislation on regulating funds utilization by companies is not nearly complete. At present, only the PRC Insurance Law and the Administration of Insurance Companies Procedures have addressed this issue in a general way, but there is no specialized legislation formulated or even any plans to formulate such specific laws. It seems that the CIRC is paying more attention to regulation of companies' sale of their insurance products. By contrast, the People's Bank of China in 2002 promulgated the Administration of the Business of Holding Funds in Trust of Trust and Investment Companies Tentative Procedures. These rules function in addition to the general administrative rules governing trust and investment companies, and have helped standardize the capital trust business in China. The central bank's work in this area can serve as a good reference and model for the CIRC in its own legislation in a related area.