‘Insurance companies and pension funds as institutional investors: global investment patterns’, authored by Trusted Sources, a leading emerging markets research specialist, examines the role that pension funds and insurance companies have played in increasing liquidity in established capital markets, by introducing long-term and stable funds. It goes on to suggest that liberalisation of investment mandates for insurers and pension funds could prove similarly beneficial in the high-growth Chinese and Indian markets, increasing both depth and liquidity in their capital markets.
The report can be downloaded from www.cityoflondon.gov.uk/researchpublications.
In China, the role of both insurance companies and pension funds in the stock market is very small – each holds only around 2% of issued shares. Recommendations flagged up by the report include: increased competition amongst insurance companies; tax incentives for Unit Linked Insurance Products; introducing effective dividend pay-out rules for listed companies; encouraging the development of expertise of fund managers in insurance companies and the relaxation of qualification rules for private companies allowed to issue bonds.
In India, the pension and insurance sectors are still relatively underdeveloped, with assets at 7% and 16% of GDP respectively. The report identifies measures which could facilitate rapid development of these markets including: lifting restrictions on equity investments; allowing investments in lower-rated corporate debt and derivatives; allowing the Employees’ Provident Fund Organisation to invest in equities; removing tax and regulatory constraints and increasing incentives to buy corporate bonds.
Stuart Fraser, Policy Chairman at the City of London Corporation, said: “The City of London’s position as a global financial centre makes it a natural partner for growing economies such as China and India. The experience of London shows the valuable role that robust capital markets can play in supporting a sophisticated and liquid market which is attractive to both international investors and companies wishing to raise money.
“Capital markets play a vital role in raising debt and equity capital for businesses, offering alternatives to bank financing and channelling funds from savers into the financial sector. This report finds that greater depth and liquidity in domestic capital markets is needed in both China and India to support the effective growth of their companies.
“Indeed, liberalisation of the insurance and pensions markets will result in a greater provision of capital to both countries’ businesses for their domestic and international expansion.”
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