The China Insurance Regulatory Commission (CIRC) said Monday it had promulgated regulations that allow insurance companies to replenish their capital base by issuing subordinated bonds.

The move follows a precedent set by the China Banking Regulatory Commission, which allowed Chinese banks to do so last year.

Allowing insurers to issue subordinated bonds will help them improve solvency margins, a CIRC spokesman said. Proceeds from such bonds are calculated as second-tier capital when regulators appraise insurers' solvency margins.

Broadening insurers' capital raising channels will also help expedite the development of the Chinese insurance industry, which is now greatly hampered by capital inadequacy.

Only the three largest Chinese insurance companies launched initial public offerings during the past year and raised their capital strength. Others generally tried to improve their capital strength by increasing existing shareholders' equity or ushering in foreign investors.

"All those channels face the problems of lengthy time and high cost," the spokesman said. "Difficulty in fund raising has become a major problem hindering the development of China's insurance industry."

Insurers are allowed to issue subordinated bonds with maturities no shorter than five years, and the bonds rank behind all issuer liabilities and only before preferred and common stocks in terms of claims on issuer assets.

And the issuers are not allowed to repay the bonds if they cannot meet regulatory solvency requirements after they do so, and creditors are not entitled to file bankruptcy charges in the event the issuer fails to repay.

(China Daily October 10, 2004)