China Bans Some Credit-Risk Insur ance Products

Insurers are no longer allowed to sell policies that protect holders against default risks of some financial products， such as asset securitization， creditor rights transfers， private placement bonds， as well as publicly offered bonds with a credit rating lower than AA+， the China Insurance Regulatory Commission （CIRC） said recently.

The CIRC is also tightening its oversight on insurance policies for financial products sold online. The regulator said online lending platforms must publicize relevant credit insurance products to minimize misleading advertising. To protect creditors， these platforms often require issuers to obtain insurance policies before they can sell products.

Insurers are also required to improve internal risk-management measures and submit a report to the regulator before April every year， detailing its operations and potential risks， the CIRC added.

Last year， two subsidiaries of Guangdong-based electronics manufacturer Cosun Group defaulted on bonds sold through an online wealth management platform backed by Alibaba Group Holding Ltd. Zheshang Property and Casualty Insurance Co. had provided credit risk insurance for the bond issuance， but initially refused to compensate investors because of suspected fraud from the issuer. Following further investigation， the insurer began to compensate bond holders from Dec. 28， and is expected to pay out nearly 1.15 billion yuan（$170 million）.

Chinas Ponzi Scheme

Last year， Chinese authorities arrested more than 20 suspects who are accused of involvement in a massive Ponzi scheme that allegedly swindled hundreds of thousands people out of billions of dollars.

The arrests reported by state media relate to E-zubao， a peer-to-peer lending platform that promised investors attractive returns of as much as 15% when it launched a year and a half ago.

But the man behind the platform， Ding Ning， is now accused of gobbling up new capital largely in order to pay off existing investors， according to the official Chinese news agency Xinhua. Ding and 20 others have been arrested on suspicion of embezzling 50 billion yuan （$7.6 billion） from around 900，000 investors.

Authorities began investigating Dings company， Yucheng Group in 2015. During the probe， investigators reportedly found 1，200 account books stashed in sacks buried 20 feet underground.endprint

E-zubao has become one of the largest investment scandals to emerge from Chinas shadow-banking world -- a dark， unregulated patch of the countrys financial system that offers murky investments with extremely high rates of return among other services.

Theres often no transparency about where exactly investor money is going -- and the investment vehicles have vague names， such as “wealth management products.” In some cases， theyre sold through privately run exchanges or via online platforms， like E-zubao.

Such services have proliferated as Chinese people look for places to invest their savings. For retail investors， there are few options to get more bang for their buck with domestic stock markets in turmoil and the property market struggling. Plus， these investments are at times marketed by large stateowned banks， which some investors see as an implicit guarantee.

Experts have long fingered Chinas big shadow banking sector as a potential problem for the worlds second-largest economy. And now， as the countrys growth is on the wane， concerns are increasing about the ability of borrowers to pay off debts.

Scandals in the Chinese Bond Market Accelerate the Reform

The latest scandals in the Chinese bond market have revealed weak internal risk control at financial institutions， which may help accelerate the reform of Chinas financial regulation toward a more coordinated regime， analysts said.

One incident that shook the market was the bond financing scandal involving Sealand Securities Co， a mid-sized securities firm which is facing huge losses for trading bonds through high-risk leveraging tools. The firm later claimed that the trading contracts were fake documents drafted by former employees who forged the firms official seal.

In a separate incident， a $43 million debt default by Cosun Group， a Chinese telecommunication firm， has left many investors fearing that they will not have their money repaid.

The bonds issued by Cosun Group were sold on a peerto-peer online lending platform owned by Alibaba-backed Ant Financial Services Group. The default caused a domino effect in the insurance and banking sector as Zheshang Property and Casualty Insurance Co and Guangfa Bank have offered guarantee service for the bond payment.

“The two incidents have exposed serious problems in the corporate governance and internal risk controls of the Chinese financial institutions，” said Liu Junhai， a business law professor at Renmin University of China in Beijing.endprint

Liu said that Chinas financial regulators would probably now tighten their scrutiny on the securities markets in the coming months and would boost regulation on the risk management and compliance side of the financial institutions.

The analysts said that the two incidents occurred in a regulatory vacuum， as they involved cross-market trading in the over-the-counter bond market， the online financing sector， as well as the insurance and banking sector.

“It is necessary for the country to set up a super regulator so that it could help clear some regulatory blind spots，” Liu said.

The China Securities Regulatory Commission said that it would supervise Sealand Securities and other relevant parties to carry out solutions to address the risks.

Restrictions on Insurance Company Investments

The CIRC previously announced more restrictions on insurance company investments in listed companies. Some key highlights of the regulations include：

Stock investments： CIRC distinguishes stock inv （shareholding <20% of listed companies total shares） from major stock inv （>20%）. For major stock inv， insurance company needs to submit relevant materials （including source of fund， follow-up inv plans， estimated period of holdings， etc） to CIRC for record-keeping within 3 days of shareholding increase.

Takeover acquisition of listed companies： Insurance companies need to seek CIRC approval for acquiring listed companies in the form of takeover and can only use shareholdersfunds （not policyholders funds） for such acquisition activities.

Acquisition activities involving Non-insurance concert party （NICP）： 1） CIRC requires more information on solvency and risk management if an insurance company invests in listed companies with its NICP； 2） If an insurer continues to increase the shareholding after reaching 20% （thus considered a major stock inv） together with its NICP， the insurer should use shareholders fund for further inv. 3） Joint takeover acquisition of listed companies with NICP is forbidden.endprint