Investors watch stock prices on Wednesday. Guangdong province has taken 100 billion yuan ($15.8 billion) from its pension funds and entrusted them to the National Council for Social Security Fund for investment in the capital market. [Photo / China Daily]

Guangdong can put 40 percent of local retirement funds into stocks in experiment

A Chinese province won permission on Wednesday to try out investing money from its largely unmanaged pension funds into the country's capital markets.

Analysts said that change could help the funds maintain their value and could have far-reaching consequences for domestic stock markets.

With the approval of the State Council, China's cabinet, the southern province of Guangdong has taken 100 billion yuan ($15.8 billion) from its pension funds and entrusted them to the National Council for Social Security Fund for two years. The council now manages social security funds that are raised from both sales of shares in State-owned companies and from central government grants.

In a statement posted on its website, the council said pension-fund investments will mainly go into fixed-income securities, which are largely risk-free in China, where there is a lack of high-yield bonds.

The assets most likely to be bought are government, commercial and financial bonds, but the National Council for Social Security Fund didn't rule out investing in the stock market. Equity investors in China have long wanted pension funds to invest into the country's stock market in the hope that doing so would push the market out of the doldrums.

The council's rules forbid it from putting more than 40 percent of its investments into equity investments, meaning that up to 40 billion yuan can go into the stock market.

The Shanghai Composite Index, which tracks many Chinese stocks, edged up 0.06 percent to close at 2378.20 points on Wednesday, helping to reverse a 1.38 percent slump on Tuesday.

In Guangdong's case, the National Council for Social Security Fund has said it will shoulder all of the risk that arises from investing the province's pension money into capital markets. It has also promised that Guangdong's rate of return will be no lower than that on a two-year deposit.

The council, which manages about 800 billion yuan, has a record of making sound investments. Over the past decade, it has realized a 9.17 percent annual yield by investing into equities and corporate and government bonds. Its equity investments, which on average make up 19.22 percent of its total assets, have an annualized yield of 18.61 percent, according to data from the council. Those results are better than those obtained by most Chinese mutual funds.

Local media have reported that Guangdong's experiment with investing pension funds could be extended to other parts of the country if it proves successful.

The test, though, has met with mixed responses from investment analysts and economists. Proponents say giving pension funds access to capital markets will bring greater returns to pensioners and more liquidity to the capital markets. Opponents, though, say that China's capital markets, with their uneven track records, are risky places to put money from pension funds, which tend to place a priority on safety.

"It's essential that the country better manage its pension funds or else some people might be left without pensions when they retire," said Zheng Bingwen, head of the Chinese Academy of Social Sciences' Global Pension Fund Research Center. Zheng estimated that China's pension funds will need an additional 1.3 trillion yuan if they are to meet their future obligations.

In China, little is now done to manage national pension funds. Employees are required to pay into them but virtually nobody is responsible for ensuring that the rate of return on pension money exceeds the national rate of inflation, which has shot up in recent years.

A report released on Sunday by Wuhan University said the yields on pension funds, when they are adjusted for inflation, have likely been negative in recent years.

By the end of 2010, only 31.8 billion yuan of the country's 1.6 trillion yuan in pension fund assets had been invested in securities, according to the Ministry of Human Resources and Social Security. The rest of them were mostly sitting in banks, earning interest at rates that were often lower than the rate of inflation.

Meanwhile, the experiment with allowing pension funds to invest in the country's capital markets is also seen as a way to increase the percentage of institutional investors that are in the nation's capital markets, especially the stock market. That is expected to make the stock market more stable and rational.

In an article published this month, Guo Shuqing, chairman of the China Securities Regulatory Commission, vowed to bring more institutional investors into the country's stock market and said that welcoming pension funds will be a means of accomplishing that goal.

Li Daxiao, an analyst with the research company Yingda Securities Co Ltd, said in an online comment that pension fund investments can help boost the demand for blue-chip stocks, reduce speculation and establish the habit of investing in companies that have underlying value.

Wang Jianhui, chief economist with Southwest Securities, said Guangdong's experiment is not likely to result in a large amount of money being invested in equities. Even so, Wang said, it's becoming more and more common for pension funds to enter the Chinese stock market.

"Many of the Chinese stock market's troubles are caused by the excessive number of individual investors out there and by their strong tendency to speculate," Wang said. "The market will be better when there are more institutional investors."

But Zheng Gongcheng, director of Renmin University of China's China Social Security Research Center, said now is not the time to allow pension funds to put money into the stock market.

He said people's pensions should not be made dependent on the performance of listed companies, which tend to be unreliable.

Zheng said pension funds should be invested in the real economy, or the part of the economy having to do with goods and services.

"Public projects, such as transport projects, affordable housing projects, and projects for elderly people and children, are usually undertaken by the government and require a lot of money," he said.

Chen Xin in Beijing contributed to this story.

gaochangxin@chinadaily.com.cn