Banking & Finance

Taking cover

UnionPay cracks down on capital flight through the insurance market


New policy pressures

Visitors to Hong Kong from mainland China used to line up in the shopping districts in their hundreds, desperate to get their hands on luxury handbags. But more recently, they have been waiting in line for something rather less flashy: insurance coverage.

The trend has become a concern for China’s foreign exchange regulators because so many of the visitors seem motivated by moving their cash offshore. And at the end of October the queues were even longer than normal, after speculation that the Chinese government was about to clamp down on the practice.

Sure enough, it then made its move, trying to reduce the outflow with new restrictions on how customers use UnionPay to pay for their insurance coverage.

The state-controlled bankcard issuer said cardholders would no longer be able to use their plastic to buy insurance products with investment or saving elements, which have been the bestsellers in the booming Hong Kong market.

UnionPay also acted earlier this year to slow the flow, when the payment service provider announced that purchases of insurance products overseas would be capped at $5,000 per transaction (see WiC313). But the curb wasn’t very effective. “All you need to do is to swipe the bankcard several dozen times,” Hong Kong’s Apple Daily later explained, and Bloomberg has cited one example in which an insurance salesperson swiped a single card 800 times.

Demand for the insurance deals is underpinned by the appeal of the Hong Kong dollar, which is linked to the greenback. Over the last month, the Chinese central bank has been weakening the daily reference point for the yuan’s trading against the dollar, which has fallen to an eight-year low. With further declines expected, Hong Kong’s insurance market is awash with cross-border capital. According to the Financial Times, sales at UK-based Prudential were up by more 58% in the first half of 2016 and Hong Kong now accounts for more than half of its total sales in Asia, compared with a fifth five years ago. About half of current sales at AIA Group, which is listed on Hong Kong’s stock market, are also being generated by Chinese visitors,

An insurance insider told WiC that mainland investors have preferred investment-linked polices denominated in foreign currencies. This segment of the market is likely to be affected by the latest restrictions but visitors are still allowed to purchase general insurance products (such as healthcare or accident) with their UnionPay bankcards.

They can also pay for investment-linked insurance with bankcards issued by the likes of VISA and MasterCard, although only a small percentage of mainland Chinese have these cards.

UnionPay’s previous clampdown in March did little to slow demand and official data suggests that cross-border purchases climbed 1.4 times to HK$16.9 billion ($2.2 billion) in the third quarter of this year, accounting for nearly 40% of new policies issued in the city. “Many mainland Chinese feel more secure if they are insured in Hong Kong,” Oriental Daily notes, with WiC’s local source insisting that there is huge appetite for health insurance. The belief is that Hong Kong-based medical policies are more reliable than domestic schemes, and typically their premiums are lower than the mainland providers.

China’s central government has a more benign attitude to offshore purchases of this type because they are non-speculative and have clearer social utility. By contrast, the investment-linked products are seen as preferred routes for capital to leave the country, and more insidiously for black money to escape offshore too. Hence China’s insurance regulator has been visiting foreign insurance firms and intermediaries in Beijing as part of the review of the illegal sale of products in Hong Kong, Shanghai Securities News has reported.

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