The rapid growth of China’s insurance and wealth management industries could provide long-term support for global asset prices, even as other structural factors potentially pull valuations down.
Many analysts have long argued that the retirement of the baby boomer generation, particularly in the US, will lead to widespread selling of financial assets as retirees draw down their savings. A broad reversal of quantitative easing, a process that has yet to start in Europe, the UK or Japan, could add to the pressure as central banks sell down their holdings.
However, the sheer scale of growth in China’s financial industry is likely to provide a shot in the arm for global assets, particularly fixed income securities.
“We have started to see new [insurance] business growth being very strong in China. China is growing up,” said Shaunak Mazumder, a global equities fund manager at Legal & General Investment Management.
“China’s mutual fund market is set to grow fivefold by 2025, becoming the second biggest in the world,” added Douglas Morton, head of Asia research at Northern Trust Capital Markets, who saw take-up of life insurance also rising fivefold by 2028.
The Middle Kingdom is already underwriting growth in the global insurance industry. In 2016, China accounted for 2.4 percentage points of the 2.5 per cent global growth in life insurance premiums, according to data from Swiss Re, a Zurich-based reinsurance group.
Life premiums surged 29 per cent in real, inflation-adjusted terms to $263bn, reaching 10 per cent of the global tally for the first time.
Non-life premiums rose 20 per cent to $204bn, rendering China once again the main driver of growth. Across emerging markets premium growth was an impressive 9.6 per cent; strip out China and this figure falls to just 1.7 per cent, Swiss Re said.
China is now the world’s second-largest non-life insurance market after the US, and is third overall when life business is factored in, a fraction behind Japan.
Despite this impressive growth, the market may still be in its infancy, however. When floods hit China’s Yangtze River basin in 2016, resulting in estimated economic losses of $22bn, insured losses were just $400m due to low penetration, Swiss Re said.
Measured as a proportion of gross domestic product, China’s insurance premiums are only the 39th highest in the world, at 4.15 per cent. In per capita terms, they are only 47th highest, at $337, compared with $4,000+ in the likes of the US, UK and Taiwan.
Mr Morton said the rapid growth in Chinese GDP per head in the past 20 years or so had mirrored that seen in South Korea in the period from 1970. Income levels are now comparable to South Korea’s in 1992, after which insurance penetration “exploded” from 2.4 per cent to 10 per cent in the space of five years. He expects something similar to happen in China.
“Recent years have seen Chinese GDP per capita rise, on average, by about $2,000 per person every five years. This rate of growth is very similar to that seen in South Korea from 1970 onwards, as the country underwent many of the same structural shifts and financial liberalisations as China is currently undergoing,” Mr Morton said.
“Should these trends continue, we could expect Chinese life insurance penetration to reach 10 per cent, from its current 2 per cent, by 2028, with penetration doubling over the next 2.5 years.”
Mr Mazumder at LGIM draws allusions not just to South Korea but also to the historical experience of Japan, which saw rapid income growth, followed by strong growth in financial assets, between 1960 and 1980, arguing that “history does not repeat itself, but it does tend to rhyme”.
“When you have prosperity you start to think ‘how do I transfer my wealth to my kids or make sure my family will be OK if something happens to me?’”
In addition, he said there was a “top-down” push from the Chinese government to encourage take-up of insurance products, given the rising cost of looking after an ageing population.
“They are starting to see the burden on the system. Healthcare costs are rising at 10-15 per cent a year. They need to take that burden out of government and move it to the individual,” said Mr Mazumder, who forecast that China’s insurance premium to GDP ratio would double from 4.2 per cent to 8.5 per cent by 2025, equivalent to annual business growth of 15-20 per cent.
Such growth would still leave China’s insurance penetration rate below that of present-day Japan, South Korea and Taiwan. However, China’s rate is already ahead of some middle-income European countries, such as Greece and the Czech Republic, as the first chart shows.
If it rose to 8.5 per cent, it would be markedly higher than in present day-Norway, Spain and the US, and close to levels in Switzerland and France, all far wealthier countries.
Mr Mazumder did not believe this would be an unrealistic scenario, however, pointing to the relatively poor provision of public medical care in China and the weak welfare state, meaning many people feel the need to save significant cash sums to protect themselves and their families in times of need.
In addition, LGIM forecasts that growth in China will propel Asia-Pacific including Japan to become the world’s largest wealth management market by 2021, overtaking North America, with assets rising from $53tn to $78tn, as illustrated in the second chart.
Financial assets are likely to rise far faster, Mr Mazumder said. At present, 65 per cent of the wealth held in Asia-Pacific ex-Japan is in the form of cash, with just 23 per cent in equities and 12 per cent in bonds, according to research by Boston Consulting Group.
If the region became only a little more like Europe, where 37 per cent of wealth is held in cash, or North America, where the figure is just 14 per cent, as depicted in the third chart, this would imply trillions of dollars of additional investment in equities and bonds.
When it comes to insurance policies, many Chinese people have traditionally travelled to Hong Kong to buy a dollar policy, where the proceeds are largely invested in the US bond market.
With Beijing increasingly clamping down on this in an attempt to reduce capital outflows, mainland insurance policies are likely to become more central. According to Mr Mazumder, these are typically 70-80 per cent invested in Chinese bonds, with a further 10-20 per cent in Chinese equities and only a little in global markets, although this is starting to rise.
“Chinese insurance companies will increasingly be buyers of global assets,” supporting prices, he argued.
Such support may not be permanent, however. His best guess is that the “demographics are bad for asset prices” argument will come back into play around 2030 or 2035, when the ageing of the Chinese population intensifies and retirees start to sell down their accumulated assets in a global market that may be structurally short of buyers.