Feb. 24 (Bloomberg) -- China’s insurance regulator plans to allow insurers to buy unsecured corporate notes for the first time to spur economic growth and development of the debt market, according to an official at the agency.

The China Insurance Regulatory Commission will require insurers to set up internal credit-rating systems before allowing them to invest in debt not backed by a third party, said the official, who declined to be identified before the agency finishes gathering opinions on the rules. Insurers are now only permitted to buy bonds of state companies with guarantees.

The regulator urged China Life Insurance Co. and Ping An Insurance (Group) Co. to buy more corporate bonds and equity stakes in November to complement government plans to spend $586 billion to spur growth in the world’s third-biggest economy. China’s mutual funds were barred from buying unsecured corporate debt by the securities watchdog in April on concern that the notes were too lightly traded.

“This would definitely be good news for the market,” said Qu Qing, a bond analyst at Shanghai-based Shenyin & Wanguo Securities Co. “The policy shift will also expand investment channels for insurance companies.”

Thirty-four companies have sold a 225 billion yuan ($33 billion) of two to 10-year medium-term notes since April, Chinabond data show. Such notes are the major unsecured corporate debt available in China. The central bank started to allow local companies to sell such securities on the interbank market in April.

Yield Advantage

Triple A-rated corporate notes due in three years yielded 2.89 percent yesterday, according to Chinabond, the country’s biggest debt-clearing house. That compares with 1.57 percent for a similar-maturity Chinese government bond.

“It’s good news for insurers as unsecured bonds offer higher returns,” said Tong Chengdun, a Shenzhen-based analyst at Ping An Securities Co. “But the investment risk will increase too. Bigger companies with better risk management abilities should be able to benefit more.”

Companies may need until the end of the year to meet the qualifications to buy the notes, the official from the commission said.

Insurers should “improve utilization of insurance funds and support the nation’s economic construction,” the regulator said in the Nov. 17 statement. “Insurers should act as a long- term institutional investor in the capital markets and help ensure market stability.”

A senior official at China Life, the nation’s largest insurer, confirmed that the CIRC is seeking opinions on the draft regulation. He declined to be named because of internal policies.

Last month, China authorized commercial banks to trade bonds on the stock exchange in a trial program. In December, the country promised to allow foreign banks to trade bonds in the inter-bank market.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

Last Updated: February 24, 2009 05:26 EST