May 21, 2010 / 10:14 AM / 10 years ago

Insurers eyeing Hong Kong's yuan hunger face hurdles

HONG KONG (Reuters) - Insurers are lining up launches of yuan-denominated policies in Hong Kong to tap investor expectations of a rising yuan, marking another step in the Chinese currency’s trek towards globalisation.

Tourists look at a view in the Bank of China Tower opposite to AIA Central, previously AIG Tower, at Hong Kong's financial Central district February 12, 2010. REUTERS/Bobby Yip

While the move could provide a long-term growth opportunity for insurers active in Hong Kong, including American International Assurance, a unit of AIG, and Canada’s Manulife, it brings severe asset-liability mismatch headaches to the companies.

It also raises questions whether insurance should be used as a vehicle for speculation.

This month, HSBC’s insurance arm launched its first product denominated in yuan, also known as the renminbi, in the former British colony, setting the stage for others to begin selling similar products.

“Many clients are buying in anticipation of an appreciation of the renminbi, and we do expect similar products to appear in the market over time,” said Bruno Lee, HSBC’s head of wealth management in Asia.

Hong Kong has become the test-bed for many of Beijing’s experiments with the yuan as it takes small steps towards its ultimate aim of standing alongside the greenback as one of the world’s preferred reserve currencies.

For many buyers, the prospect of currency appreciation appears to be foremost on their minds. Most people now believe China will allow its currency to start appreciating again by the end of the year, following a two-year hiatus in which it has remained steady against the U.S. dollar.

The yuan policies would be a new product offering for insurers in the competitive Hong Kong market, where insurance premiums make up almost 10 percent of the territory’s GDP, compared to under 3 percent in China.

LACK OF INVESTMENT OPTIONS

The biggest downside, and potential roadblock, to the development of new products, is the lack of investment options for yuan holders, a reality that could leave insurers with piles of the currency collected as premiums and nowhere to invest it.

Yuan investment options are highly limited for most foreigners at present, as Chinese stock and debt markets are now closed to them.

Roger Steel, chief executive of Canadian insurer Sun Life Financial’s Hong Kong branch, said his company is examining how best to meet customer demand for these products “given the relative scarcity of yuan investment opportunities.”

Some are trying to get Qualified Foreign Institutional Investor (QFII) status, which allows major non-Chinese investors to buy Chinese ‘A’ shares listed in Shanghai and Shenzhen.

Only 95 firms have such status at present, including major institutions such as HSBC, Singapore’s DBS, Manulife and ING Bank.

Investors who live outside of Hong Kong and want a piece of the yuan insurance pie may be unable to get it as most insurers will probably limit such policies due to the relative scarcity of yuan-denominated investment products.

“We’re currently marketing the yuan insurance product only to those living in Hong Kong,” said HSBC’s Lee. “There’re limits on how much we can invest in China, and once we hit that, we can’t take any more money in.”

Another option is to work with Chinese life insurance titans such as China Life and Ping An, but they have little interest in taking their products outside of China, content with their home market’s own breakneck growth.

“China insurance is still a huge growth story,” said Yang Jianhai, an analyst with Essence Securities in Shanghai. “Management at Chinese insurers have enough on their plate right now dealing with domestic growth, and I don’t see them moving overseas anytime soon.”

A bank sales agent working at an HSBC branch in Hong Kong who gave his name only as Fok said he had received many enquiries about the new yuan insurance product, but most were concerned about the long lock-in period.

“This (yuan insurance product) is only for very risk-averse long-term investors,” he said. “If you’re hoping to make a quick buck, just go to Shenzhen and open a bank account there. They have higher interest rates in China anyway.”

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