China's insurers, among the world's most valuable after reaping record gains from a stock rally, risk "massive" redemptions and liquidity difficulties should markets slump, the industry regulator said.

"Once the capital market heads for a downturn, we will suffer very badly and face huge risk," Wu Dingfu, chairman of the China Insurance Regulatory Commission said in Beijing last week. "There can be massive redemptions and insurers may face liquidity difficulties."

"Insurers' share prices are extremely sensitive in the short term to their equity investment results," Dominic Chan, a Hong Kong-based analyst at CLSA Asia-Pacific Markets, told Bloomberg News. "Chinese insurance companies will face a double whammy as they increasingly eye stakes in foreign insurers, which have even higher exposure to equities."

China Life, the world's second-largest insurer by market value, rose 8.4 percent to HK$33.50 ($4.29) in Hong Kong trading on Friday. The Beijing-based company has a market value of US$163 billion after climbing more than fourfold in the past two years.

Ping An Insurance (Group) Co, which bought a stake in Belgium's Fortis in November, surged nine percent to HK$68.20. China's second-largest insurer depends on investment gains from stocks and bonds for about 30 percent of revenue.

China Life Insurance Co and rivals earned a record 279.2 billion yuan ($38.7 billion) from investment returns last year, more than the previous five years combined, the commission said. The gains underscore the industry's dependence on a stock market that has lost 14 percent from its October 16 peak after surging more than sixfold in the previous two years.

Chinese insurers "blindly" boosted sales of investment-linked policies last year to benefit from the stock market, Wu said without giving figures.

The CSI 300 Index gained one percent to 5,077.43 on Friday. The index had a record two-day plunge earlier last week as stock markets worldwide slumped on concern of a United States recession.

Insurance premiums rose 25 percent to 703.6 billion yuan in 2007, the regulator said.

(Shanghai Daily January 28, 2008)