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A Sound Interaction of Insurance/Capital Markets Needed
A sound interactive relationship must be formed by insurance with a sound capital market to be developed in China as a component of its whole financial build-up.
First, sound insurance needs a healthy capital market; second, an active part has to be played by proceeds from insurance to ensure the rise of a sound capital market. To this end, corresponding reforms and every possible innovation effort will have to be made for a sound interaction and development of insurance with capital markets.
There will be no insurance to speak of when short of a sound capital market to be developed, a pressing problem calling for a solution that has to be found in China. Insurance in China at present is developing still at an initial stage and in a deplorable underdeveloped state in view of the number and types of insurance companies developed and of the operation and space of their funds and channels exploited. As is known by experience from other countries, insurance companies, as a credit medium in organizing, dissipating risks and providing risk guarantee, must possess many a varied means and the ability to make most of their proceeds and the ability to guarantee the safety and returns from "life-saving" proceeds.
In contrast, securities investment pursuits, especially stocks investment, for their high long-term interest return, have become the first choice of insurance companies in various countries to make most of proceeds from insurance. To work for a raise of the ability of insurance for compensation in China as a whole there is every necessity for China to open up new investment fields to ensure insurance proceeds with an inlet into capital markets. We are happy now to see that the Chinese government has permitted insurance proceeds to make purchases out of bonds investment fund, thereby setting an inlet on stage for insurance proceeds to move into the capital market.
On the other hand, as things stand now with a sound capital market to be developed in China, an inlet is completely necessary for insurance proceeds to operate on the capital market. At present, China is still being jolted by a speculative securities market, a market given to big price rises and falls. Some listed companies totally lack the concept of values, resulting in a continuous decrease in overall interest and cut interest returns by stockholders. Risks are involved without doubt. A basic cause preventing a thorough elimination of abnormal market operation like these lies in an over-decentralized securities market investment structure developed, a piteously small number of investors in institutions and an overwhelming majority of individual investors. To promote a sound securities market to be developed in China, a continuously increased number of investors must be nurtured and as an important part of this is to develop a large number of insurance companies at the earliest date. As shown by experiences from developed and some developing countries, insurance proceeds form a major fund source to prop up a sound capital market to be developed in China. Take the US for example, long-term funds from insurance take about one third of capital market funds to be drawn for use by enterprises in the US.
It goes without saying to ensure a sound interaction of insurance with capital markets merely opening an inlet for insurance proceeds in capital markets is far from being enough and must be helped by other necessary measures taken. Due to the fact that insurance companies are under trusteeship, being run on behalf of investors, sound stable business operation and safety of insurance proceeds must be absolutely ensured by a sound interaction of insurance with capital markets. All disorderly competition on insurance markets should be righted to run in an orderly manner.
Owing to the fact that insurance proceeds are funds accumulated by investors for needy times and life insurance, not the least of losses should be incurred. Insurance proceeds demand therefore a stable, transparent and fair capital market. To guarantee the safety of insurance proceeds, an orderly regular capital market must be further developed in China. A practical regular role by capital and a raise in efficiency of capital will call for strengthened supervision by concerned departments over "fair, just, above board" market operation and less interference by administration in markets. Necessary measures should also be adopted to release and restrain market "foams" to guard off risks from markets as a whole.
To translate into practice a sound interaction of insurance with capital markets constitutes another important condition for a role to be played by insurance in improving service and developing new products and guaranteeing the safety of insurance funds on capital markets. Renovation of products on capital markets may provide a variety of choices for a safe inlet for insurance proceeds and help in developing an enlarged space for operations of insurance funds. There is also the necessity for new insurance products to be developed, better placed at the service of capital markets and further bountifully rewarded with large amounts of interest returns from the latter. In these, there are many good examples having been noted abroad. To link investment pursuits with insurance is an insurance variety that has been developed and embraced for its insurance operation and its strong investment feature. In so doing, funds long kept in the hands of residents will likewise be induced and have the largest amount of value accrued when these are being used both as insurance proceeds and guarantee funds. There are many instances that have been tried out and developed in many foreign countries like the US and other European countries over the years. But a serious study of things is still needed whether should all those be applicable to China. (By Wu Jinglian, fellow researcher of State Council Development Research Center)
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