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The National Development and Reform Commission had completed a draft document entitled "Temporary Administrative Provision on Private Equity Funds", which will ultimately regulate private equity investment generally. The draft was filed with the State Council for approval at the end of June. The National Development and Reform Commission is likely to release the text of the provision for comment following the entry into force of China's new Insurance Law at the start of October. Before the provision is officially published, the China Insurance Regulatory Commission will invite public comments on its two rules, which are understood to have been circulated for internal feedback already. Its announcement on September 7 2009 that it was inviting a third round of public comments on the Administrative Provision on Insurance Companies' Equity has been taken as an indication that more rules concerning equity investment are likely to follow in October, perhaps including private equity investment rules.

It seems certain that the China Insurance Regulatory Commission intends gradually to expand the channels in which insurance funds may invest. However, insurance companies contemplating private equity investment should consider the following:

• The forthcoming sets of rules are expected to limit an insurance company's capital for private equity investment to 8% of its investable assets - an indication of the regulator's prudential supervisory policy. In addition, the rules are likely to restrict insurance companies to investing from their own reserves, with capital from insurance product accounts - especially unit-linked life insurance and universal life insurance accounts - being excluded from private equity investments.
• Due to the highly technical nature of private equity investment, insurance companies that plan to invest in the equity of unlisted companies will probably be required to establish a subsidiary to conduct and manage such investments independently. The rules will probably require that such subsidiaries have at least 10 to 20 professionals specializing in private equity investment, which would represent a significant barrier for many small and medium-sized insurance companies.
• The rules may leave small and medium-sized insurance companies the option of entrusting private equity investment to qualified insurance asset management companies, although it is understood that the rules contain no explicit statement on this point. The investment model for small and medium-sized companies may ultimately be copied directly from the infrastructure investment rules.

For many large Chinese insurance companies, the development strategy is to build a suitable financial platform. Insurance group Ping An offers a possible model for them to follow. In order to invest in private equity, property and infrastructure, Ping An Group established the Ping An Trust, Ping An Asset Management and Ping An Securities, respectively. In turn, Ping An Trust established a wholly owned subsidiary, Shen Zhen Ping An Innovation Capital Investment Co Ltd, which focuses on investing in banks and financial assets. Together with another leading insurer, Ping An has now applied to the China Insurance Regulatory Commission to approve Ping An Trust's establishment of a private equity investment company so that it can launch its private equity investment program as soon as possible after official publication of the rules.
 

It was reported the CIRC approved Beijing Bank's, Bank of Communications' investment plans in Pacific-Antai Life Insurance Co., Ltd. and China Life-CMG Life Assurance Company Ltd. In short, Beijing Bank and Bank of Communications are approved to purchase the equity of the insurance company. As the Chinese government has recently relaxed restriction on investments made by banks, this will be the first time a bank has purchased equity in an insurance company.

Since 1993, separate operating systems for different financial sectors (securities, banking and insurance) have been adopted. The securities, banking and insurance sector have been supervised by the CSRC, CBRC and CIRC separately. Recently, pilot programs involving the Financial Sectors' Mixed operation were approved by authorities for the purpose of diversifying China's finance. The, Chinese banking industry has also obtained 583,400,000,000 RMB (net profit after tax) in 2008, a growth of 30.6% year on year. It is no doubt that the approval of these pilot investment programs will benefit the banking industry.

GUO Tianyong, Professor of the China Banking Research Center in CUFE（China University of Finance and Economics has mentioned that whether China's four largest banks may invest in insurance companies has been discussed internally since last year. However, no policy has been formed until now. As a result of the new policy, financial supervisory departments will likely pay more attention to the ability of insurance companies and banks’ to handle financial risks in order to prevent illegal flows of capital.

Additionally, since 2006, certain financial institutions such as the Industrial and Commercial Bank of China, Bank of China and Construction Bank of China have been approved to purchase the equity of other financial institutions in the field of banking, securities, insurance, trust and lease by way of establishing a financial holding group

These reforms should bring positive effects for China's banking sector and the Chinese economy as a whole. Given the tightening of credit markets, the ability for banks to channel their funds into new forms of investment will be greatly anticipated.
 

It is understood that the CIRC has drawn up two regulations to implement the pilot program: the Administrative Measures for the Equity Investment by the Insurance Institutions and the Operating Guideline for the Insurance Institutions' Equity Investment in the Infrastructure. Prior to the introduction of these two regulations, insurance funds had already begun to make equity investments within the insurance industry. In March 2006 the CIRC promulgated the Administrative Measures for the Pilot Indirect Investment of the Insurance Funds in the Infrastructure which permitted 5% of total life insurance funds and 2% of total property insurance funds to be invested in infrastructure projects. The State Council approved infrastructure investment programs worth RMB12 billion of which RMB10 billion was allocated to China Ping An Insurance Company's investment in infrastructure projects and RMB 2 billion was allocated to China Life Insurance, People's Insurance Company of China and TaiKang Life Insurance Company.

Soon after on July 20, the ceremony for the delivery of the stock of the Taichang, Changjin and Jinjiao expressways in Shanxi was held and the expressway project funded by China Ping An Trust & Investment Co. Ltd began. This was the first infrastructure project indirectly funded by Chinese insurance funds. The CIRC has since ratified many infrastructure investment project investments by Ping An Insurance Company such as the Jingdong expressway project in Hubei province and the water facilities project in Liuzhou, Guangxi province. Such projects demand large amounts of capital and long operating periods, which match the investing profiles of insurance funds.

In September 2006, the CIRC promulgated the Notice of the Investment in the Stock of the Commercial Bank by Insurance Institutions, permitting insurance institutions to invest in the equity of unlisted banks, such as state-owned commercial banks, joint equity commercial banks and urban commercial banks within China. China Life Insurance Company, the largest insurance company in China, made an investment in Guangdong Development Bank and Ping An Insurance Company merged with Shenzhen Commercial Bank. The process of allowing insurance funds to be invested in unlisted banks and in the equity of unlisted companies has resulted in the ban on investing insurance funds being gradually removed. With the implementation of the PRC's newly revised Partnership Enterprise Law, the channels available for insurance funds to be invested in the equity of unlisted companies will continue to expand and diversify. This will further accelerate the fixed financial operation reform in China.

These new markets provide new opportunities for providers of legal services. The new opportunities coexist with challenges for lawyers specializing in insurance and investments. Perhaps the reforms will hasten the return of a bull market allowing the Chinese capital markets to boom once again.