China’s Pension Fund Market Entry Not Bailout
Allowing China’s pension fund to invest in the stock market was not intended as a bail out, but to create long-term and stable returns, said the vice minister of human resources and social security Friday.
The change will eventually have a positive effect on China’s real economy and support a healthy capital market, but the core purpose is to gain long-term and stable yields for the fund, vice minister You Jun said.
The fund’s management must prioritize safety, and the timing of the fund’s entry into the stock market will be decided by the market, You added.
The State Council finalized guidelines Sunday allowing the pension fund to invest in new products, including the domestic stock market.
The guidelines allow the fund to invest in more than 20 financial products, including high-risk stocks and equities, as well as low-risk bank deposits and bonds, which diversify the investment risk, You said.
To minimize risks, the guideline restricts the maximum proportion of investment in stocks and equities to 30 percent of total net assets.
The fund will also participate in major projects and purchase shares in state-owned enterprises to gain long-term yields, he added.
Around CNY2-T (US$330-B) of the funds total assets can be invested, You said, adding that the amount will increase as the fund grows.
China’s pension fund, which accounts for roughly 90%t of the country’s total social security fund pool, had net assets of CNY3.5-T (US$547-B) at the end of Y 2014.
The pension fund was previously parked in banks or invested in treasury bonds with low yields, provoking calls for change as China faces the challenge of caring for its growing elderly population.
The new policy came as China’s stock markets continued to decline, beset by shrinking volume and greater volatility. The Key Shanghai index dove more than 30% from its June highs, erasing out most of this year’s gains.
“Market-oriented operation of the pension fund requires more market supervision by authorities,” said You.
The National Council for Social Security Fund (SSF), a social security strategic reserve for China’s future aging population, played an exemplary role in increasing the fund’s investment returns.
The SSF has had an average yearly return of 8.5% over the past 14 years as of Y 2014 and outpaces the consumer price index growth.
The SSF has a bigger investment scope than the pension fund and is allowed to invest in domestic and overseas stocks as well as fixed income assets.
In China, private urban employees pay for their pension before retirement and usually get a pension equal to about half of their final salary.
By Xiang Bo
Paul Ebeling, Editor
HeffX-LTN
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