Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Can China Life Insurance Co. play catch-up? That depends how it treats its latest investment in China United Network Communications Ltd.

Ping An Insurance Group Co. is this year's market darling, with a total return of 55.8 percent so far. State-owned China Life is languishing at just 15.4 percent, and its shares are 42 percent cheaper than Ping An on embedded-value basis.

Falling Behind
China Life is now 42 percent cheaper than Ping An
Source: Bloomberg

It wasn't always that way. The valuation discount started to appear only in 2016 -- for the whole of 2014 and much of 2015, China Life was on top.

One could argue the company deserves better. It's a pure play on life insurance, with stable cash flow from customers for years to come. Ping An, by contrast, still gets 17 percent of its profit from the troubled banking business, which generates a paltry 6.2 percent return on equity. In the first half, total revenue from life policies in China rose 26 percent from a year earlier and was the fastest-growing main segment in the industry.

China Life also has a safer portfolio. More than 40 percent of Ping An's equity holdings are in non-public investments such as wealth-management products, Bernstein Research estimates. 

A Safer Haven
China Life has a more conservative investment portfolio than Ping An
Source: Bernstein Research

China Life's lead started to erode when it took a $3 billion stake in state-owned China Guangfa Bank Co. in February 2016. Last week's 21.7 billion yuan ($3.25 billion) investment in China Unicom only reaffirmed investor suspicions that the insurer will have to play a key role in the so-called national team that's expected to rescue troubled SOEs. 

The Unicom investment is large even for the cash-rich China Life, accounting for about 15 percent of the company's holdings of common stocks. That's a departure from a history of conservative investments. According to Bloomberg Intelligence analyst Steven Lam, the company is expected on average to start repaying policy holders within five years.

When China Life announces second-quarter earnings Thursday, management is likely to be dogged by investor questions on how the Unicom stake will be treated. Unicom says "private" investors -- including China Life, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. -- will get four board seats, and since the insurer is by far the largest single investor, it should automatically get one.

If that's the case, China Life may need to equity-account its Unicom stake, because a board seat suggests it will have some control over Unicom's operations. The investment will be reported on its balance sheet at book value and won't be marked to market.

Unicom's A-shares soared by the 10 percent limit when it resumed trading Monday, giving China Life a one-day paper profit of 4.4 billion yuan -- about 20 percent of its expected operating income this year. The equity method, however, means the insurer can't book this capital gain.

The alternative is to be treated as a passive investor in Unicom, which would allow China Life to book the holding at market prices. But 21.7 billion yuan -- more than the Alibaba, Baidu Inc. and Inc. investments combined -- for no board seat? That's national service indeed. 

Until China Life's role in SOE reform is clearer, expect that valuation discount to persist.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at

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Paul Sillitoe at