SHANGHAI: Scholars and experts welcomed Tuesday a guideline on the management of the city's social security fund as an investigation into abuse that has implicated senior officials and business leaders continues.

They said Shanghai is one of the first cities to demand the fund be put into a special account, as required by top authorities.

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In recent weeks, a pension fund scandal has gripped the city and led to the sacking of Shanghai Party chief Chen Liangyu and China's top statistician Qiu Xiaohua.

Shanghai authorities are now investigating Yuan Yonglin, president and deputy chairman of the board of the listed Shanghai Haixin Group.

But an effective supervisory mechanism and transparent management are still needed to eradicate malfeasance and embezzlement, the scholars and experts said.

The guideline, issued during Monday's municipal government meeting, requires the fund to be deposited in an account specially opened for the money, and its income and expenditure should be independent. It also required the fund be used only for specific purposes.

"The proper management and use of social security funds, in defending against all possible risks of abuse, is an extremely important and urgent task," said a statement from the meeting.

China's social security funds have witnessed an average increase of 20 per cent annually over the past years, posing new administrative challenges.

Figures from the Ministry of Labour and Social Security show that by the end of 2005, the total size of the nation's five social insurance funds pension, medical care, work-related injuries, unemployment and pregnancy funds had reached 696.8 billion yuan (US$87 billion).

"Prior to the scandal, which involves the misuse of more than 3 billion yuan (US$380 million) of the city's social security funds, Shanghai had been a model city in terms of management of the fund," Feng Jin, a researcher at Fudan University said yesterday.

"Shanghai has taken some bold steps in the management of the fund totalling roughly 10 billion yuan (US$1.2 billion), including the guideline issued on Monday," she added.

However, Wang Dewen, an analyst with Chinese Academy of Social Sciences, said yesterday that a special financial account cannot guarantee the money would not be misused.

"They could make up a false record that shows the money still exists on the account but secretly embezzle it," he said. "The way to fundamentally resolve the problem is to set up an effective monitoring mechanism and require transparent transaction procedures."

But he agreed that Shanghai is heading in the right direction and making positive changes.

According to Xiang Huaicheng, chairman of the National Social Security Fund Council, China's social security fund racked up investment income of 12.14 billion yuan (US$1.52 billion) in the first nine months of 2006, at a yield of 6 per cent.

Thanks to the bullish market in the first half of the year, stock investments contributed 50 per cent of the figure, he said.