Shanghai, July 6 (BNA): Chinese investors are rushing abroad to make dollar deposits and buy Hong Kong insurance, in a sign of waning domestic confidence and that the ailing yuan is facing more pressure.
The outflows highlight deep concern about the state of the Chinese economy as the long-awaited epidemic recovery stalls. Consumer spending is declining, the real estate market and stock markets are in the doldrums and cash is piling up in savings.
According to Reuters, brokers say individuals are responsible for the increase and it shows no sign of complacency, which analysts warn could add pressure on the yuan as it swings at eight-month lows.
Mainland Chinese holdings under an emerging scheme allowing investment in wealth products in Hong Kong and Macao have more than doubled since the end of last year, to 814 million yuan ($110 million). New premiums collected on insurance policies in Hong Kong jumped a staggering 2,686% to $9.6 billion in the first quarter of 2023.
“More and more people are realizing they can’t put their eggs in one basket,” said Helen Chow, an insurance broker who is busy helping mainland clients sign Hong Kong deals, citing frictions between China and the United States and pessimism about China’s future as motivating factors.
Insurance in Hong Kong has long been a conduit for buying Chinese assets abroad, with policies offering more protection than what’s available on the mainland, and accompanying savings and investment products mostly in dollars with a global transfer.
AIA Group, Prudential and Manulife reported a jump in business, citing contributions from mainland investors.
A wealth manager at Noah Holdings said he recently arranged for a group of mainland clients to sign insurance contracts in “long lines”, many unsettled by China’s sudden incursion in December of COVID-19 intolerance to the virus.
“Some customers were a bit shocked by the policy shift, and became pessimistic about China’s economy,” he said.
“The rush to buy insurance in Hong Kong reflects a bleak local outlook and fears about an uncertain future.”
He said Hong Kong savings insurance products offer a minimum yield of 4.5%, better than the 3% offered on the mainland. He asked not to be identified because he is not authorized to speak publicly.
Offshore insurance is a convenient tool for distributing assets globally, Noah Holdings said in an emailed statement, while Hong Kong’s location makes it a natural destination for mainland investors.
Meanwhile, dollar deposits in Hong Kong provide a hedge against yuan movements and, for one year, yield 4%, according to the Bank of China. On the mainland, one-year dollar deposits yield 2.8%, while yuan deposits yield 1.65%.
These returns are the attraction. The gap between two-year Chinese and US government bond yields is the widest in 16 years, in favor of the US, and global stocks are higher while China is heading sideways.
“External demand for policies denominated in Hong Kong dollars is low — policies denominated in US dollars are more widespread, to provide access to a global asset allocation,” said Lawrence Lam, CEO of Prudential Hong Kong.
Total demand is certainly still below pre-COVID levels, and the surge in interest was expected to coincide with the reopening of China’s borders because signature policies require a visit to Hong Kong.
However, it comes as the yuan appears increasingly fragile. An earlier, and larger, rush of outflows in 2016 prompted Beijing to tighten capital controls and unveil other measures to curb insurance buying.
Noah’s wealth manager fears that the ongoing rush into insurance in Hong Kong threatens to tighten Beijing’s policy.
Chinese authorities have already stepped up efforts in the past few weeks to prop up the yuan, as state banks sell dollars and the central bank has warned it will protect against the risks of large exchange rate moves.
Hao Hong, chief economist at GROW Investment Group, notes that the outflows also coincide with the reluctance of exporters to return dollar proceeds – another weight on the currency and a sign of low confidence in the economy.
He notes that the yuan’s real exchange rate is below the rock bottom seen during the 2015-2016 Chinese stock market crash and capital flight.
While this makes a potential source for the yuan’s rebound later in the year, according to Tan Xiaofen, a professor at Beihang University’s School of Economics and Management, caution is likely to prompt individual outflows.
“We’ve seen some changes in the risk-taking attitudes of mainland visitors, which have moderated a more balanced approach to their investments,” said Sami Abouzahr, Head of Investments and Wealth Solutions at HSBC Hong Kong.
“They are still interested in investment opportunities but are also paying more attention to their health and legacy needs with their legacy medical and planning insurance solutions.”
($1 = 7.2513 CNY)
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