The usual investing advice is don't mix up insurance with investing. The fees are high, the restrictions many, the fine-print hard to read. Basically, there are far better alternatives ... at least in the U.S.. An American investor can buy an ETF with a 0.10% expense ratio paying little or no brokerage commission. That is amazing because just up north in Canada or across the Atlantic in Europe, the low expense options are 10 years behind. And in China, it's 30 years behind as all funds -- whether index or not -- have loads. (The loads range from 1.5% for index funds to 2.5% for actively-managed funds.) That's assuming you want to invest in the schizophrenic Chinese stock market at all.
For this reason, annuities and guaranteed insurance contracts (GICs) are more popular in China than in the U.S. Despite the stories in the news about house wives and taxi cab drivers lining up at brokerages to dabble in the stock market, I have yet to run into anybody with a significant stock portfolio. Those who do want to earn more money than what their pitiful bank accounts pay often put their money into investments offered by insurance companies.
That isn't to say the insurance offerings are simple to follow either. For example, a bank official handed me a pamphlet with the following offering:
- Contribute 10,000rmb annually for 10 years
- Withdraw 1000rmb annually for 15 years
- After 15 years, you will have accumulated 12,500rmb in interest
- After 15 years, you will get a maturity bonus of 70,500rmb
The average person would understand "contribute X and have Y after Z years" -- simple enough to add up the numbers to get just RMB returns. But any more complex analysis is touch since the complexity makes it hard to compare against offerings from competing insurance companies or even the same company. Luckily, I have a
spreadsheet that lets you input all the factors in and backtrack the return rate until the ending balance matches.
After collecting up a bunch of brochures and having bankers/brokers walk me through the numbers, here's a run-down on a few GICs:
Company Broker Contribution Withdrawal Ending Balance Rate
------------- ------- ------------ ---------- -------------- -----
China Taiping AG Bank 1 x 10,000 none 5yr / 134,000 6.03%
China Taiping AG Bank 10 x 10,000 15 x 1000 15yr / 183,000 7.13%
China Taiping private 5 x 10,000 15 x 500 15yr / 112,000 7.32%
China Taiping private 10 x 10,000 20 x 1000 20yr / 303,000 8.32%
China Taiping private 20 x 10,000 30 x 2000 30yr / 847,000 8.14%
The interest rates look good but we have to factor in both risk and inflation. Since 1990, here are the inflation numbers for China:
1990-2008 = 5.0%
2000-2008 = 2.6%
By comparison, the numbers for the U.S.:
1990-2008 = 2.8%
2000-2008 = 2.8%
China Taiping is a state-run enterprise so they have the implicit backing of the Chinese government. If any developed country had China's balance sheet, the rating agencies would rate their bonds as quadruple-A. (The U.S. is triple-A even with our horrendous debt.) But since it's not a democratically-elected government, there is a risk that the government may simply repudiate any such debts in times of crisis. That risk brings the credit rating down to perhaps the muni bond level where defaults have periodically occurred.
With our comparison defined, we can pull the numbers for Vanguard's bond options:
Intermediate Term Treasury 6.3yr 2.86%
Intermediate Term Tax Exempt 6.3yr 3.75%
Intermediate Term Bond Index 7.5yr 3.79%
Intermediate Term Inv-Grade 7.1yr 4.06%
Long Term Treasury 20.2yr 4.64%
Long Term Tax Exempt 8.8yr 4.65%
Long Term Bond Index 22.5yr 5.24%
Long Term Inv-Grade 23.6yr 5.85%
If you look at the above numbers, something will jump right out at you. Long Term Tax Exempt has a maturity of 8.8 years compared to 20+ for the other long term bonds. This makes using only TE funds as our basis for comparison convoluted. Luckily, the Bond Index seems to have matching rates at intermediate maturity so we will use Bond Index as the proxy for long term.
Comparison #1 using China Taiping 5-year GICYield 6.03% - Inflation 2.6% (3.43%) <--> Yield 3.74% - Inflation 2.8% (0.94%) ==> + 2.49%
At 2.5% higher real rates, this China Taiping GIC is far more appealing than any intermediate bond fund or 5-year CD. Until
Helicopter Ben let's interest rates go back up, fixed income in the U.S. is a real turn-off.
Comparison #2 using China Taiping 20-year GICYield 8.32% - Inflation 5.0% (3.32%) <--> Yield 5.24% - Inflation 2.8% (2.44%) ==> + 0.88%
For long-term fixed income, the gap is much smaller at about 0.9%. Going by this numbers alone, I would not put money into a 20-year GIC as the extra return may not compensate for unknown risks. However, the Chinese government maintains an artificial peg to the U.S. Dollar and
the consensus is the CNY is 20%-40% undervalued. While there's no way the CNY will simply be unpegged in a flash, over a long period I expect the CNY to slowly rise as the people of China demand more internal spending versus throwing surplus money back into U.S. Treasuries. If it gained back 20%, that would boost the 20 year return to 10% annually -- 12.5% at 40%. For this reason, this long-term GIC looks quite tempting.
(Filed in china, investing)
Guaranteed Insurance Contracts
Posted by Mossy
April 2, 2010 1:59 PM
That isn't to say the insurance offerings are simple to follow either. For example, a bank official handed me a pamphlet with the following offering:
- Contribute 10,000rmb annually for 10 years
- Withdraw 1000rmb annually for 15 years
- After 15 years, you will have accumulated 12,500rmb in interest
- After 15 years, you will get a maturity bonus of 70,500rmb
The average person would understand "contribute X and have Y after Z years" -- simple enough to add up the numbers to get just RMB returns. But any more complex analysis is touch since the complexity makes it hard to compare against offerings from competing insurance companies or even the same company. Luckily, I have a spreadsheet that lets you input all the factors in and backtrack the return rate until the ending balance matches.After collecting up a bunch of brochures and having bankers/brokers walk me through the numbers, here's a run-down on a few GICs:
The interest rates look good but we have to factor in both risk and inflation. Since 1990, here are the inflation numbers for China:
By comparison, the numbers for the U.S.:
China Taiping is a state-run enterprise so they have the implicit backing of the Chinese government. If any developed country had China's balance sheet, the rating agencies would rate their bonds as quadruple-A. (The U.S. is triple-A even with our horrendous debt.) But since it's not a democratically-elected government, there is a risk that the government may simply repudiate any such debts in times of crisis. That risk brings the credit rating down to perhaps the muni bond level where defaults have periodically occurred.
With our comparison defined, we can pull the numbers for Vanguard's bond options:
If you look at the above numbers, something will jump right out at you. Long Term Tax Exempt has a maturity of 8.8 years compared to 20+ for the other long term bonds. This makes using only TE funds as our basis for comparison convoluted. Luckily, the Bond Index seems to have matching rates at intermediate maturity so we will use Bond Index as the proxy for long term.
Comparison #1 using China Taiping 5-year GIC
Yield 6.03% - Inflation 2.6% (3.43%) <--> Yield 3.74% - Inflation 2.8% (0.94%) ==> + 2.49%
At 2.5% higher real rates, this China Taiping GIC is far more appealing than any intermediate bond fund or 5-year CD. Until Helicopter Ben let's interest rates go back up, fixed income in the U.S. is a real turn-off.
Comparison #2 using China Taiping 20-year GIC
Yield 8.32% - Inflation 5.0% (3.32%) <--> Yield 5.24% - Inflation 2.8% (2.44%) ==> + 0.88%
For long-term fixed income, the gap is much smaller at about 0.9%. Going by this numbers alone, I would not put money into a 20-year GIC as the extra return may not compensate for unknown risks. However, the Chinese government maintains an artificial peg to the U.S. Dollar and the consensus is the CNY is 20%-40% undervalued. While there's no way the CNY will simply be unpegged in a flash, over a long period I expect the CNY to slowly rise as the people of China demand more internal spending versus throwing surplus money back into U.S. Treasuries. If it gained back 20%, that would boost the 20 year return to 10% annually -- 12.5% at 40%. For this reason, this long-term GIC looks quite tempting.
(Filed in china, investing)
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