China struggles to stem outflow of wealth

Posted on July 28, 2016

The AIA Central building, home to the headquarters of AIA Group Ltd., center, is seen through a window standing among other skyscrapers in the business district of Central in Hong Kong, China, on Thursday, July 23, 2015. AIA Group, the third-largest Asia-based insurer by market value, posted a 21 percent increase in new business value as China became its second-largest market for the first time by that measure. Photographer: Xaume Olleros/Bloomberg©Bloomberg

China’s foreign exchange regulators are struggling to stem the flow of personal wealth spilling offshore via Hong Kong’s insurance industry, the latest results from the world’s second-largest insurer suggest.

On Thursday AIA Group said that the value of new business in the territory increased by 60 per cent to $537m in the first six months of the year, noting a “substantial uplift in new business from mainland Chinese customers”.

    The State Administration of Foreign Exchange has attempted this year to close off channels that allow people to move large sums of money offshore, including the use of Chinese-issued credit cards to buy expensive insurance policies abroad.

    AIA’s growth in the value of new business was “largely driven by the surge in industry sales to mainland visitors, part of the broader capital outflows from China after the surprise fall of RMB last August”, according to a note from Goldman Sachs.

    Businesses and individuals in China have increasingly sought to move wealth offshore in the face of a slowing economy, a volatile stock market and the falling value of the renminbi.

    Offshore insurance products in Hong Kong have been a popular haven to hold individual wealth since China began devaluing the renminbi in August last year. The currency has fallen to Rmb6.65 against the US dollar from Rmb6.21 on August 9 last year.

    Once customers buy insurance policies using renminbi, they can use them as collateral for US dollar-denominated loans. They can also cash out of the products into a foreign currency.

    The strong demand for those products has come against the wishes of China’s capital control watchdog.

    China allows individuals to exchange up to $50,000 a year into foreign currencies but Safe said in February that it would enforce a $5,000 cap on the purchase of financial products through credit cards issued by China UnionPay, the country’s state-controlled card monopoly. UnionPay has said those checks were already in place.

    People involved in Hong Kong’s insurance market say the cap has not prevented Chinese customers from swiping their UnionPay cards multiple times in order to surpass the $5,000 cap.

    “The bottom line is that there is huge pressure from individuals to bring money out of China,” said Kevin Lai, chief Asia economist at Daiwa Capital Markets. “They are always finding new ways of getting around the regulation.”

    Customers from China have paid out far more for premiums than average customers. Average single-paid premiums for life and investment-linked policies bought by Chinese were HK$3.7m-HK$6.1m (US$477,000-US$786,000), Moody’s said in a report this year, compared with the average HK$75,000-HK$122,000.

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