Circular on Increasing the Scope of Bond Products in which Insurance Institutions May Invest

(Issued by the China Insurance Regulatory Commission on March 19 2009.)

Insurance companies and insurance asset management companies:

With a view to promoting the sustainable healthy development of the insurance industry, we have, pursuant to the Tentative Measures for the Administration of Investments in Bonds by Insurance Institutional Investors (the Tentative Measures), decided to revise the policy on bond investments so as to expand the scope of investment, increase the products that may be invested in, enhance asset allocation and guard against risks in application of proceeds. We hereby notify you of relevant matters as follows:

1. Increase in certain bond products that may be invested in:

(1) Local government bonds that the Ministry of Finance issues and handles redemption of on behalf of such governments are added to the government bonds mentioned in Article 8 of the Tentative Measures.

(2) Debt financing instruments of non-financial enterprises, such as medium-term notes issued on the domestic market, and unsecured bonds, such as bonds and convertible bonds issued on the Hong Kong market by large state-owned enterprises, are added to the enterprise (corporate) bonds mentioned in Article 28 of the Tentative Measures.

An insurance institution shall centrally plan its domestic and foreign bond product allocations based on the principle of managing asset-liability matching.

2. Investment in the relevant bonds shall comply with the following provisions on percentages:

(1) the percentage for local government bonds that the Ministry of Finance issues and handles redemption of on behalf of such governments shall be handled with reference to Article 8 of the Tentative Measures;

(2) investments in unsecured bonds shall be counted as part of the balance of enterprise (corporate) bonds and be handled in accordance with Item (1) of Article 31 of the Tentative Measures. The balance of relevant unsecured bonds may not exceed 15% of an insurance institution's total assets as at the end of the preceding quarter;

(3) the portion invested in a single type of unsecured bonds of one issuance that has a long-term credit rating of AAA or equivalent as rated by a domestic credit rating agency, and the issuer on the domestic market of which is a large state-owned enterprise (group) under the central government, may not exceed 20% of the issued quantity of such bonds in the issuance in question, and the balance thereof may not exceed 5% of an insurance institution's total assets as at the end of the preceding quarter;

the portion invested in a single type of unsecured bonds of one issuance that has a long-term credit rating of AAA or equivalent as rated by a domestic credit rating agency, and the issuer on the domestic market of which is another type of enterprise that is in an industry supported by the state's industrial policy, may not exceed 5% of the issued quantity of such bonds in the issuance in question, and the balance thereof may not exceed 1% of an insurance institution's total assets as at the end of the preceding quarter;

(4) the portion invested in a single type of unsecured bonds of one issuance that has a credit rating of at least A or equivalent as rated by an internationally recognised credit rating agency, and the issuer on the Hong Kong market of which is a large state-owned enterprise, may not exceed 5% of the issued quantity of such bonds in the issuance in question, and the balance thereof may not exceed 1% of an insurance institution's total assets as at the end of the preceding quarter;

(5) the balance of investments in the secured enterprise (corporate) bonds and unsecured bonds issued by one enterprise may not, in total, exceed 10% of an insurance institution's total assets as at the end of the preceding quarter and may not exceed 20% of the net assets of said enterprise during its most recent financial year; and

(6) the investment percentage for financial debt and subordinated debt issued by policy banks and renminbi-denominated bonds issued by policy banks before a change in form shall be handled in accordance with Article 13 of the Tentative Measures, and the investment percentage for renminbi-denominated bonds issued after a change in form shall, in accordance with the provisions of the relevant department, be handled in accordance with Article 13, 18 or 21 of the Tentative Measures.

3. An insurance institution wishing to invest in unsecured bonds must establish a custody mechanism for the proceeds, its internal credit risk assessment capabilities shall satisfy regulatory standards and it shall determine the risk limit for its investments in unsecured bonds, monitor its credit risk exposure in real time and regularly analyse and report its relevant risk position.

4. An insurance institution shall adjust the scale of its unsecured bond investments in line with changes in its solvency. An insurance institution that has a quarterly solvency adequacy ratio of less than 150% may not invest in unsecured bonds. If the solvency adequacy ratio of an insurance institution falls below 150% for two quarters in succession, it may not increase its holding of unsecured bonds.

5. An insurance institution shall adhere to the principle of prudence; comprehensively consider its capital, solvency and risk-bearing capacity; rationally allocate the asset types that it trades, can provide for sale, can hold until maturity, etc.; reduce the adverse effect arising due to large fluctuations in the fair value; and maintain consistency in its investment policy and the stability of its returns. The provisions of the Tentative Measures concerning the calculation of investment balances based on cost price are henceforth to be handled in accordance with the new accounting guidelines.

6. The CIRC will oversee bond investments of insurance institutions in accordance with the law. If an insurance institution violates laws, regulations or this Circular, the CIRC will impose administrative penalties in accordance with the law.