Pension funds inch closer to stocks

New guideline doesn't mean massive money will chase shares swiftly, analysts say

China has moved a step closer toward allowing the country's massive pension funds to play the stock market.

On May 1, the national guideline to regulate the management of the pension funds took effect. It is the first of its kind issued by the central government.

The guideline will allow the country's pension funds to invest in riskier products, including fixed-income products, stocks and private equity funds.

China's total pension funds stood at 3.98 trillion yuan ($600 billion) at the end of 2015, according to data from the Ministry of Human Resources and Social Security.

The new regulation caps the maximum investment in stocks at 30 percent of the fund's total net assets.

Analysts said the new regulation will pave the way for a faster flow of local pension funds into the stock market.

Another development that signaled the funds' entry into the stock market is the fresh attempt by the National Council for Social Security Fund or NCSSF to hire professional fund managers and accountants through its website.

The NCSSF is a national social security reserve set up by the central government in 2000 to support future social security expenditures and other social security needs. It is a supplementary and strategic fund in addition to the country's overall pension funds which are managed by local governments.

In 2012, the central government initiated a pilot program to allow the NCSSF to manage the pension funds on behalf of the local governments.

It is very likely that the government will expand this year the program to allow more provincial-level pension funds to entrust their funds to the NCSSF, said Li Lifeng, an analyst at Sinolink Securities Co.

Guangdong and Shandong provinces already received the regulatory approval to entrust their pension funds worth about 200 billion yuan to the NCSSF for investment in the domestic capital markets.

But analysts said the new guideline does not mean massive amount of pension funds will enter the stock market immediately.

"We think an estimated 20 to 30 percent of the funds will be allocated to stock-related assets at the initial stage," said Li.

Jin Weigang, a researcher at the Ministry of Human Resources and Social Security, said the NCSSF is so far the only professional investment agency qualified to manage the pension funds.

"It is now still drafting detailed policies and contracts for investing on behalf of local pension funds," Jin said.

For years, China's pension funds were parked with banks in the form of deposits, or were invested in treasury bonds with low yields.

The rate of investment return has been lower than the growth of inflation, meaning the funds have seen its assets shrink in value.

The situation also sparked concerns over whether the country was capable of addressing the issue of a rapidly aging society.

Since the beginning of this year, policymakers and regulators have been increasingly vocal that the country's pension system needs to be reformed.

Li Chao, vice-chairman of the China Securities Regulatory Commission, said last month that China needs to improve its old-age pension system as it is hardly able to deal with the aging population issue.

lixiang@chinadaily.com.cn