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Chinese Pension Funds Begin Investing in Equities, Bonds

The decision is a fundamental change in the way China’s pension funds are managed.

 

In a move to boost returns, Chinese pension funds have begun investing in securities, a radical change from their traditionally low-risk, low-return strategy of leaving the funds in banks, or investing in treasury bills.

Seven provincial-level regions, including China’s two largest cities of Shanghai and Beijing, have entrusted their pension funds to the National Council for Social Security Fund (NCSSF) for investment.

The National Social Security Fund (NSSF) is China’s social security reserve fund to supplement and adjust the social security spending, such as social insurance during the peak time period of the aging of population. The funding sources of NSSF include fiscal allocation from the central government, the transfer of state-owned capital and the fund investment proceeds, and capital raised by other methods approved by the State Council.

Although the provincial governments are not allowed to invest in financial products such as equities and bonds, the NCSSF is allowed. The fund holds close to $300 billion in assets, and has returned an average 8.8% per  year since 2000, included a 15% investment return in 2015, according to Bloomberg News, citing Shanghai’s Securities Daily state media reports. However, the locally managed pension funds only returned approximately 2.3%

Chinese state news agencies reported that 360 billion yuan ($52.41 billion) is being transferred from bank accounts operated by local authorities to the NCSSF for centralized asset management.

The decision, which is a fundamental change in the way China’s pension funds are managed, was first announced in 2015. The State Council had issued guidelines to ease investment rules on pension funds, and allowed their entry into the stock market, which had been suffering from extreme volatility.

The hope was that the markets would become more stable from the massive injection of long-term investments that could come from pension funds, while at the same time the funds would benefit from higher returns.

In December, the Chinese government approved 21 pension-fund management institutions, which included 14 fund management companies, six insurance companies, and one securities firm. China Asset Management, China Life Pension, and CITIC Securities were among the approved firms.

On Wednesday, China's State Council announced it will further loosen access restrictions on private investment, and encourage participation in sectors such as medical services, elder care, education, culture and sports. The government will encourage investment funds dominated by private capital and operating under market mechanisms, according to a statement released after a State Council executive meeting.

There will be more financing channels in the equity and bond markets, and collateral financing, enabling companies to use their intellectual property rights and rights to earnings as collateral to secure financing. Favorable policies in land use and taxation for private investment will also be established.

By Michael Katz