Insiders Say China’s Bond Tax Reversal Will Limit Insurance Impact

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China’s decision to reintroduce the tax on bond interest income is expected to have a minimal effect on the yields and profitability of insurance companies, as well as their asset allocation strategies. Industry insiders suggest that while the tax will influence bond yields, the overall impact on gross and net investment returns will be relatively small.

On August 1, the Chinese government announced a 6 percent value-added tax on interest income from treasury bonds, local government bonds, and financial bonds issued after August 8. Bonds issued before that date will retain their tax-exempt status until maturity. Historically, the exemption from interest tax was introduced in the 1990s to encourage the development of the bond market and facilitate fundraising.

Data from Kaiyuan Securities shows that bonds made up approximately 50 percent of the total operating funds for the insurance sector at the end of the first quarter. Approximately 70 percent of these bonds are treasury bonds that pay interest. Consequently, the reimposition of the tax is estimated to reduce the yield on insurers’ investment portfolios by only about 3 basis points.

This reduction is relatively modest, especially considering that listed Chinese insurance firms posted an average net investment yield of 3.64 percent and a total investment yield of 5.63 percent last year.

Experts from Huatai Securities project that the tax will ultimately lower insurers’ net investment yields by just 2 percentage points, indicating a limited overall impact. The effect on companies’ profitability is anticipated to be even smaller; China International Capital Corporation estimates that earnings could be negatively affected by less than 1 percent in the short term.

The reinstatement of VAT on interest from treasury bonds is unlikely to significantly alter insurers’ bond investment strategies. Xu Kang, head of financial industry research at Huachuang Securities, states that historically, insurance funds tend to increase their bond holdings when bond yields fall due to declining long-term interest rates, rather than decrease them.

Some industry experts speculate that this tax might lead insurance funds to shift more toward equity investments. However, representatives from several insurance firms told Yicai that investment decisions remain influenced by multiple factors, including solvency requirements. Although bond yields may decline, bonds will still be viewed as a stabilizing asset for insurance funds.

Insurance funds generally adopt an absolute return investment approach, with a substantial portion allocated to bonds due to liability management constraints, according to Zhang Kaifeng, an analyst at Minsheng Securities. The reintroduction of the tax on bond interest income is not expected to change bonds’ role as a stabilizing asset, and long-term bonds will remain a primary focus for insurers’ investment strategies.