China's insurance authorities are considering allowing indemnity funds to be used to pay for infrastructure and other key construction projects.

It is an attempt to help insurance firms build up their repayment capabilities.

Insiders said the loosening, still being contemplated by the China Insurance Regulatory Commission (CIRC), would serve as a provisional measure before the commission finally allows insurance firms to directly trade stocks, a policy the companies have been lobbying for years.

If the insurance companies can prove they can manage risks and ensure profitability in their construction project investments, in addition to making progress in internal management, the policy of direct stock trading may soon follow, sources said.

Analysts say construction projects are a desirable option for local insurance firms that are seeking safe investment channels to manage their assets more profitably.

"It should be fairly workable, as the risk level is relatively low,'' said Tuo Guozhu, an insurance professor with the Beijing-based Capital University of Economics and Business.

"And it's what all the other countries are doing,'' he said, adding insurance companies in many foreign countries typically put a sizable portion of their funds in infrastructure projects as well as real estate.

Premium incomes at China's insurance firms are growing fast, soaring 32.7 per cent on a year-on-year basis in the first quarter of 2003.

But a narrow investment scope -- mainly bank deposits, Treasury bonds, financial bonds and securities funds -- has cramped yield, stoking worries about their payment capability when claims peak. Chinese insurers can only trade stocks through securities funds.

Average investment return dipped to 3.14 per cent last year from 4.3 per cent in 2001 as the stock market tumbled.

But the CIRC is quickening its liberalization of the use of insurance funds, an issue it has long been cautious about for fear of the associated hazards.

Earlier this month, it introduced a looser regulation on bond investments, broadening the investment scope from bonds issued by central government-affiliated enterprises to all businesses with an AA upward credit rating.

Also, insurance companies now can use up to 20 per cent of their total assets to purchase corporate bonds, as compared to a 10 per cent ceiling previously.

But the regulators have not opened the flood gates.

Tuo said his proposal two years ago about allowing insurance firms to invest in infrastructure projects in China's western areas, where the government is spending huge amounts of money, has shown no sign of being brought under consideration.

And one insurance firm had to retract its offer to invest all of the 6 billion yuan (US$722 million) that was needed for a subway extension project in Shanghai last year when the CIRC refused to loosen its rules, although the city warmly welcomed the offer.

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