It is still adding up as China's market reforms gather pace, triggering more drastic reshuffling of the old labour and welfare systems.

The two challenges to governmental officials are how to manage the limited welfare fund efficiently and keep a sufficient reserve for an ageing population.

They have experimented over the past few years, one trial was introducing a market-oriented social security system and establishing a central social security reserve fund in 2000.

The reserve fund, controlled by the National Council of Social Security Fund (NCSSF) and totalling 132.5 billion yuan (US$16 billion) by the end of 2003, has been a pioneer of all welfare funds in the exploration of the capital market.

As early as mid-2001, NCSSF had acquired shares of Sinopec during the oil company's A-share offering. It chose six domestic managers to help with its securities investment at the end of 2002 and formally entered the bourses comprehensively the next year.

This February, it was allowed to invest in overseas capital markets by the State Council, though it is still making the final legal and institutional preparations to make the substantial move.

Separated from the local social security funds that are overseen by local governments and the Ministry of Labour and Social Security and mainly used to cover the current social security expenditure, NCSSF operates a strategic reserve fund controlled by the central government to support the future social security demand that will come when the ageing population reaches its peak.

As required, all mainland companies launching initial public offerings (IPOs) overseas should submit 10 per cent of their proceeds to NCSSF for the reserve.

But more needs to be done to manage the funds well and meet future demand.

"We've been trying to expand funding resources and make investments to ensure maintenance and appreciation of the funds," said Xiang Huaicheng, NCSSF chairman and China's former finance minister, at a press conference last Friday.

In 2001, when the portfolio of the National Social Security Fund was basically dominated by bank deposits and treasury bonds, the annual return rate was 2.25 per cent.

It edged up to 2.59 per cent in 2002 and moved up to 3.56 per cent last year, when about 5 per cent of the total assets were applied for equity investment.

Seeking new investment tools and having more diversification in the portfolio is one way to increase returns, though, at the same time, it also sets higher requirements for risk control.

"The priority of our operation is fund safety because what we are managing is the lifeline of the people," said Xiang.

But he went on to explain that seeking fund safety does not mean doing nothing, which is also risky.

"We will not take high risks to get high returns, or try to manipulate the market for profit-taking, or simply withdraw just because the market has its risks," he said.

Instead, the council will follow a prudent investment style and plan a long-term investment strategy. It will make thorough analysis before entering the market and pay close attention to risk control when it is in.

"We will not put all of our eggs in one basket," said Xiang.

Overseas investment, for example, will help disperse the risks.

According to a temporary regulation on the investment scheme of the National Social Security Fund, which was approved by the State Council in mid-2001, as much as 20 per cent of the fund could be invested in stocks.

Xiang said his council plans to increase the funds used for stock investment to 15 per cent this year, up from the present 5 per cent limit, given the rosy outlook of the stock market and the Chinese economy.

Experts have, however, expressed their concerns for the capability of risk control, especially in case of market fluctuation.

The government has to be prudent in the experimental investing of social security funds because the money concerns the livelihood of the retired and unemployed, said a researcher with the Labour and Social Security Research Institute.

The creditability and qualification of the fund managers are very important because any misconduct or poor management would affect the image of the government itself, he said.

Xiang's council has followed international standards when hiring fund managers, he said. It is expected to start the second round to choose new fund managers in a couple of months.

And more asset management companies, including some joint ventures, have expressed strong interest in the job.

"Apart from issuing mutual funds by ourselves, we are also interested in managing China's pension fund," said Walter Lin, president and chief executive officer of ABN AMRO Xiangcai Fund Management, a joint venture between Netherlands-based ABN AMRO and China's Xiangcai Securities Co.

It is preparing to bid for the fund manager position for NCSSF, he said.

If conditions allow, the venture would also like to do overseas asset management for the council, though that needs to be approved from authorities.

"We have to do it step by step," Lin said.

In terms of overseas investment, overseas companies certainly have richer expertise and resources, said Tang Di, an analyst with CITIC Securities Co.

Gao Xiqing, vice-chairman of NCSSF, also told China Daily the council would choose the best fund managers in the overseas market that it plans to enter.

They may not be domestic companies, who may not have sufficient overseas experience, he said.

Widely regarded as the first domestic qualified institutional investor (QDII), NCSSF has to make a good beginning and be well-prepared and properly managed for its entry into the overseas market, including Hong Kong.

Right now, the domestic capital market is still to be further standardized and fund management companies need further improvement, so it would be wise for the social security fund to have more experienced overseas managers to enter foreign markets, said Yuan Zhigang, director of the Social Security Research Institute of Fudan University.

H shares, whose prices are still cheaper than A shares, are preferred choices for the fund, he said.

Analysts in Hong Kong also estimated that it is more likely for social security fund to choose H shares, red-chips and some blue-chips with large capitalization and high liquidity.

"Hong Kong is certainly a preferred market for our overseas investment," said Xiang.

"But it will not be the only one."