UnionPay restriction will help curb short-term capital outflows

Analysts say effect unclear over longer horizon

China UnionPay, the country's leading payment service provider, announced over the weekend it will restrict Chinese mainland clients from purchasing investment-related insurance products in Hong Kong, a move that experts said may curb capital outflows.

But experts took a wait-and-see attitude toward the long-term effects of the policy due to various factors including foreign exchange rates, the domestic economy and whether overseas insurers will sell insurance products to mainland customers in other ways.

UnionPay cards issued in the Chinese mainland can only be used to buy pure insurance policies covering accidents, deaths and illnesses in Hong Kong. The purchase of insurance products including investment-related content is banned overseas, UnionPay International, a subsidiary of China UnionPay, announced on Saturday.

Domestic capital outflows through buying insurance overseas may be curbed in the short term, as large policy transactions become difficult, Ruan Mingzhu, a Shanghai-based insurance industry analyst, told the Global Times on Sunday.

A Hong Kong-based insurance employee who asked for anonymity told the Global Times on Sunday that the mainland's policies' on its citizens' tendency to buy insurance in Hong Kong have become stricter in the past year.

"For example, mainland clients could easily buy insurance products worth more than 1 million yuan ($147,600) in August 2015," she explained. But according to the announcement of UnionPay, a single transaction of insurance products using one of its cards issued in the mainland is capped at the equivalent of $5,000.

Overseas insurers' transaction volume may show a definite drop in the short term if mainland customers choose not to buy insurance overseas, Ruan predicted, noting that such customers account for a large proportion of these companies' revenue.

Mainland visitors purchased a record HK$30 billion ($3.87 billion) worth of insurance in Hong Kong in the first six months of 2016, up 116 percent year-on-year, according to a report released by the Hong Kong Office of the Commissioner of Insurance in August. The total accounted for 36.9 percent of the new insurance premiums for individuals during the period.

Overseas insurers' products and services are superior to those of mainland insurers, which may drive some mainland citizens to buy insurance products in Hong Kong, but most importantly, many see overseas insurance products as a store of wealth, experts noted.

The policy will definitely curb capital outflows to some extent, but its long-term effectiveness is still to be seen due to various factors, Xu Wenhu, head of the Insurance Institute at Shanghai-based Fudan University, told the Global Times Sunday.

The recent depreciation of the yuan as well as strict foreign exchange controls may prompt an increasing number of Chinese people to buy insurance products, he said.

The central parity rate of the yuan weakened 122 basis points to 6.7858 against the US dollar on Friday, the lowest level in six years, data from the People's Bank of China, the central bank, showed.

The country's foreign exchange reserves declined for a third consecutive month in September, to $3.17 trillion, setting a low of more than five years, The Wall Street Journal reported Saturday.

The Hong Kong-based insurance employee said her company's business may not be seriously impacted as Chinese can still buy insurance in Hong Kong in other ways.

"Chinese mainland visitors can do insurance transactions using several UnionPay cards [to avoid the transaction limit]. They can also buy insurance using Visa and Master cards. In addition, they can set up several accounts in Hong Kong and transfer their dollar-denominated assets overseas," she explained.

The State Administration of Foreign Exchange stipulates that each Chinese individual with one identification card is allowed to buy foreign currencies worth no more than $50,000 a year, but they may borrow others' quotas, she said.

Ruan said that the restrictions are temporary and the fundamental way to solve the problem of capital outflows is to strengthen the domestic economy, which can increase people's confidence and attract investment.

Xu said that Chinese insurers should improve their products and services to retain consumers.