Chinese pension funds primed for market foray

Funds hand over billions to state agency to invest in equities in hope of higher returns

BEIJING • China's pension funds are about to become stock investors. The country's local retirement savings managers, which have about 2 trillion yuan (S$403.3 billion) for investment, are handing over some of their cash to the National Council for Social Security Fund (NCSSF), which will oversee their investments in securities including equities.

The organisation will start deploying the cash in the second half, according to China International Capital and CIMB Securities.

Chinese policymakers announced the change last year in a bid to boost yields for a pension system that has long suffered low returns by limiting its investments to deposits and government bonds.

For the nation's equity markets, which are dominated by retail investors and among the world's worst performers this year, the state fund's presence is even more valuable than its cash, said Mr Hao Hong, chief China strategist at Bocom International Holdings. The NCSSF has "such a good reputation in being a value investor that if it takes the lead, the signalling effect is actually quite strong", said Mr Hong, who had predicted the start and peak of China's equity boom last year. "It's almost like Warren Buffett saying he is buying a stock."

The NCSSF, which oversees 1.5 trillion yuan in reserves for China's social security system, has returned an average 8.8 per cent a year since 2000, the Securities Daily reported earlier this year, citing official data.

The larger pension system, on the other hand, has been locally managed and made just 2.3 per cent annually to 2014.

The organisation's entry will come as Shanghai stocks begin a gradual recovery that has pared their losses for the year to 16 per cent from as much as 25 per cent. While yuan depreciation concerns are pressuring Chinese assets lower, the economy is showing some signs of stabilising.

The entry "will be a positive event in terms of sentiment but the actual impact won't be drastic," said Mr Ben Bei, an analyst at CIMB Securities in Hong Kong. "The fund will tend to be prudent and the progress may be very gradual - that is, it will enter the market over the next several years."

Venturing into China's volatile stock markets - where a crash erased US$5 trillion (S$6.7 trillion) of value last year - is not without its risks for funds traditionally focused on more stable assets. Japan's government pension fund, the world's largest, may have lost about US$43 billion in the second quarter, Morgan Stanley MUFG Securities estimated.

Low returns are a challenge for China's pension system, which is already facing pressure from a rapidly ageing population. The country's old-age dependency ratio - a measure of those 65 or over per 100 people of working age - is set to triple to 39 by 2050. The NCSSF did not respond to an e-mail seeking comment.

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A version of this article appeared in the print edition of The Straits Times on July 12, 2016, with the headline 'Chinese pension funds primed for market foray'. Print Edition | Subscribe