Benjamin Deng, Chief Investment Officer, China Pacific Insurance Group

Mind The Gap

Addressing the Asset/Liability Gap

China Pacific Insurance Group CIO Ben Deng speaks to [i3] Insights about the challenges of closing the asset/liability gap in today’s low-yielding environment and shares his excitement about opportunities in Chinese private equity.

In August last year, Ben Deng was appointed as the first Chief Investment Officer of China Pacific Insurance Group in 10 years. The appointment came after a period of strong growth for the group and it is now the third largest Chinese life insurance company at RMB1.8 trillion (A$377.7 billion).

The growth followed its listing, initially with A shares on the Shanghai Stock Exchange in December 2007 and later H shares on the Hong Kong Stock Exchange in December 2009.

“We have multiple businesses in P&C (property and casualty) insurance, life insurance, retirement insurance and asset management companies. Since we went public, all these major branches have grown quite extensively,” Deng says in an interview with [i3] Insights.

“Now it is time for us to look back and consolidate, and to coordinate better. From that perspective, we needed a group-level strategist, someone in charge of asset management strategies.”

One of the key objectives for Deng is to enhance the asset/liability management of the business.

“For internal funds, [we have] circa RMB1.3 trillion (AU$272.3 billion), roughly 80 per cent in life insurance and 20 per cent in P&C insurance, and more than RMB0.5 trillion (AU$104.7 billion) in third-party money management [activities]. To us it is important to ask: How do we better match our assets and liabilities?” he says.

Currently, the group has a gap between the average duration of its assets, which stands at about seven years, and its liabilities, with average duration of about 10 years longer. But it is not just a matter of buying more long-dated government bonds as yields are low and issuance is infrequent.

“I worked for AIG and later AIA for 18 years, and I was in charge of AIG’s Asia-Pacific risk management and the one who designed AIA’s strategic asset allocation framework,” Deng says.

“From a risk management perspective, it was one of our core strategies to reduce the duration gap, but in the meantime only reducing the duration gap using long-term government bonds is not enough, because the government bonds don’t yield much.

“But looking at our liability side, we still have a large chunk of long-term saving products; those are traditional, non-participating or participating life products. When people are in a middle-income bucket and they are middle-aged, they tend to buy savings products. So there is a big demand.

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We try to capture the opportunity before it is too late. So every time there is [a Chinese government bond] auction, we participate actively

“To meet that demand requires an optimised strategy to allocate our assets: some to long-term government bonds, some to higher-yielding corporate bonds and certain steady allocations to equities, private equity and real estate.

“In terms of duration and yield balancing, we use a barbell strategy: long-term government bonds, we buy 30-year, 50-year government bonds, and corporate bonds – you typically find in China that they have a five-to-seven-year tenure, but they are yielding 200 basis points higher than a government bond, so we have a combination of these.”

The longer end of the yield curve in China still has decent yields compared to most of the world. At the beginning of August 2019, the 30-year Chinese government bond stood at about 3.8 per cent.

“Fortunately, in China the treasury curve is still upwards sloping and we do find attractive yields in long-term bonds. The 30-year and 50-year bond yields are still healthy,” Deng says.

But yields face continued pressures, with the United States Federal Reserve lowering its cash rate in August, while the trade war between the US and China intensified this month with another round of tariffs imposed by US President Donald Trump.

“We try to capture the opportunity before it is too late. So every time there is [a Chinese government bond] auction, we participate actively. Also, we are looking in the secondary interbank market to see if there are any opportunities to buy long-term government bonds in block trades,” Deng says.

“We do set asset duration targets for our portfolio, so we will try to shrink the duration gap, but if it is too hard, then we try to maintain the gap and not make it worse.”

Deng has little choice but to use physical assets as China doesn’t have an active derivative market. There are some early indications of opening up these markets, with a number of commodity-based derivatives being listed last year, but for long-term investors there is still little choice.

“It is not possible to close the duration gap through leverage, that is, interest rate swaps,” he says.

“We have to do everything through physical investments in the markets. That is pretty hard, but we are trying our best to maintain the current level and improve it where possible.

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I do see that we have slightly improved our asset/liability gap compared to last year through the purchase of bonds, but it is opportunistic

“We will build a more comprehensive platform for derivative management. At AIA I was in charge of building a platform for derivative management and I know it was very complicated. It is not just about people trading on Bloomberg; it is about reporting, pricing, data harvesting and collateral management. So I’m taking a very cautious pace in building this.

“I do see that we have slightly improved our asset/liability gap compared to last year through the purchase of bonds, but it is opportunistic. Government bond auctions don’t come all the time; we have to seize the opportunity.”

Deng is also looking to increase the group’s allocation to private equity, partly to offset the low yields in bonds, and he is hoping to lift the overall portfolio’s allocation from low single digits to mid-single digits.

“We believe China will have a great time in the next couple of years in the private equity market. So we are increasing our allocation to private equity. We are very low in allocations to private equity today, but we are going to substantially increase it to mid-single digits, to 4 to 5 per cent roughly,” he says.

Deng looks mainly at China for exposure as the firm’s liabilities are all denominated in renminbi.

“From an asset/liability perspective, I put a lot of emphasis on currency matching. Currently, we don’t have non-RMB life insurance liabilities, so our allocation to offshore markets will be limited,” he says.

“We do have some exposures, but it is very small … tiny in fact. As long as we don’t have a substantial increase in the foreign currency liabilities, I don’t see a need to allocate much to overseas markets because currency risk is something that is definitely not in much of our strategy.”

In line with the rapid pace of technological development in China, he sees opportunities in this space, especially in the medical sector.

“Technology is developing really fast in China. We are looking at technology in the biomedical equipment side as people are getting wealthier and older hospitals need new equipment. There are some really exciting things happening in China,” he says.

“We are also looking at new telecommunication technologies such as 5G. Developments here are happening really fast, sometimes so fast we can’t comprehend, but we are looking into these things.

“Technology, biotechnology, education, retirement and elderly care are the things that are quite fashionable these days and we are keeping a close eye on them.”


[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.