UPDATE 1-China relaxes rules over insurers' bank bond investments

(Recasts, adds detail, background comments)

SHANGHAI/BEIJING, May 27 (Reuters) - China’s banking and insurance regulator said Wednesday that it would relax rules for insurers investing in banks’ capital replenishment bonds, as Beijing seeks to ease the burden on smaller banks hit by the coronavirus pandemic.

The China Banking and Insurance Regulatory Commission (CBIRC) said in a statement that it would expand the range of tier-two capital and perpetual bonds available for investment by insurance funds by cancelling requirements regarding issuer banks’ assets and credit ratings.

It also ended requirements that insurance funds only invest in tier-two capital bonds with AAA credit ratings, and in perpetual bonds rated at least AA+.

The CBIRC said insurers’ credit risk management should meet regulatory standards and that their solvency ratio should not be below 120% at the end of the previous quarter.

The relaxations follow the regulator’s warning on Tuesday of high levels of bad loans at banks due to the coronavirus pandemic.

The central bank has also said that Chinese lenders could post flat or falling profits this year due to mounting bad loans and fast-draining cash buffers. Efforts to resolve financial institutions’ risks have been slowed by the spread of the coronavirus pandemic.

In its statement, the CBIRC said that the move would widen channels for banks’ capital replenishment and expand the applications for insurance funds’ capital.

A fixed-income portfolio manager said that the move would benefit smaller banks without significantly affecting insurers’ risk profiles.

“If insurance money is already allowed to buy bank shares in the stock market, capital replenishment bonds in theory are not anything riskier,” he said.

But Dai Zhifeng, banking analyst and research unit director at Zhongtai Securities, said the move would not help all banks facing heavy burdens.

“This has limited benefits for high-risk lenders, as insurers will do their own due diligence and risk management.”

Reporting by Andrew Galbraith in Shanghai and Cheng Leng in Beijing; Editing by Toby Chopra & Simon Cameron-Moore