BEIJING/SHANGHAI, May 14 (Reuters) - Chinese insurers are channelling funds through shadow lenders to real estate and local government infrastructure projects in a bid to boost returns, six insurance and trust sources told Reuters.
The practice undermines Beijing's efforts to cut local debt risk and curb a property bubble, highlighting the difficulties regulators face in reining in shadow lending and applying regulations uniformly across China's $15 trillion asset management sector - a key task for the country's newly merged banking and insurance regulators.
The amount insurers have allocated to alternative assets - trusts, asset management plans and bank wealth management products - has surged rapidly since authorities relaxed investment rules in 2012.
Analysts warn that the complex and opaque structure of such products makes it difficult for insurers to see the ultimate borrowers and to then gauge their real exposure - a risk magnified by the long investment periods involved.
China's banking and insurance regulator did not respond to a request for comment.
"Our first concern is insurers don't fully understand the risks involved in what they are investing in because those products are not transparent," said Qian Zhu, a senior credit officer focusing on insurance at Moody's. "Those products are also causing liquidity problems for insurers."
Insurers are allowed to allocate up to 55 percent of total invested assets in alternative investments. Those investments accounted for 40 percent of invested assets in 2017, but the number has risen sharply in recent years. In 2012, the proportion was 9 percent.
Of the 40 percent recorded in 2017, the largest proportion was in debt investments, where the funds mostly end up as loans to infrastructure and real estate projects, Reuters analysis of insurance asset management product data shows.
In the three years to the end of 2017, insurers' investment in loans for infrastructure nearly tripled and nearly doubled for real estate.
Higher yields are the main attraction for insurers. Trust products posted average returns of 9.42 percent as of the end of 2017, while those on top-rated Chinese corporate bonds were around 5 percent, market data show.
"Companies have to fight for high-quality non-standard investment projects," Zhu of Moody's said of insurers. For less established ones, "it's mostly about chasing yield."
Insurers' interest is showing few signs of abating even as Beijing acts to cool an overheated real estate market in major cities and to reduce system-wide local government leverage, insurers and trust sources told Reuters.
In fact, insurers are finding they can demand higher rates for their loans because of the government crackdown as banks - traditional financiers for trust and asset management schemes - are placed under close regulatory scrutiny and have to dial back, sources said.
The products also have a long maturity - often between five and 10 years - which helps insurers match the duration of their assets to their long-term liabilities, sources and analysts said. Insurers typically have liabilities extending 15 years or more.
China Life, the country's largest life insurer, more than doubled its debt investment products, including trust and asset management plans, to 301.8 billion yuan ($47.45 billion) last year from 2016, leading to a sharp rise in overall investment yield to 4.55 percent from 2.43 percent, its annual results show.
China Life's new investments last year included a 7 billion yuan trust plan funding the development of Guangzhou's development zone, a 8 billion yuan trust plan funding Tianjin's Binhai new economic development zone, and a 10 billion yuan trust plan funding state-owned Aluminium Corp, a source with knowledge of the matter told Reuters.
China Life did not respond to a request seeking comment.
Ping An Insurance Group Co, the country's largest insurer by market value, is leaning toward working more closely with trust firms as a general policy direction, said a senior employee in its compliance department.
The insurer's investment in debt, trust plans and bank wealth management products reached 335.9 billion yuan in 2017, accounting for 14 percent of total investment, according to a Reuters calculation based on its annual report.
Ping An said in an email to Reuters that its insurance investment decisions were made based on market value and asset-liability matching.
Michelle Hu, partner at Boston Consulting Group, said that in places without mature and sophisticated fixed income markets, insurance companies facing earnings pressure "pretty much don't have much other choice". ($1 = 6.3603 Chinese yuan renminbi) (Reporting By Shu Zhang in BEIJING and Engen Tham in SHANGHAI; Editing by Jennifer Hughes and Philip McClellan)