China Pushes Pension Discipline

By Shen Hong, Wall Street Journal

March 27, 2012

China

 

China's Ministry of Finance has warned regional authorities against investing local pension funds in any but the most conservative assets, signaling its wariness over a pilot project that could allow them into the country's notoriously volatile stock market.

In a statement dated Feb. 15 but released Monday, the ministry said local authorities aren't allowed to use pension funds in accounts they manage for any form of investment other than bank deposits and government bonds. Underlying the seemingly routine statement, analysts said, are concerns that some local officials may take advantage of the pilot project to invest large sums in potentially higher-return but higher-risk assets such as stocks.

Local financial authorities need to improve a system meant to protect and enhance the value of pension funds, and ensure the safety of fund payments, the ministry said in the statement.

"The statement reiterated the ministry's emphasis on the safety of the operations of local pension funds, and it may indicate worries over potential risks from the investment in domestic capital markets given uncertainties about the economy," said Huang Cendong, a Shanghai-based analyst with Tebon Securities. "Nobody wants to see losses in the investment of local pension funds, as any losses could become a destabilizing factor."

The central government last week approved a pilot project that allows the National Council for Social Security Fund—the state pension fund—to manage pension money for local authorities. The fund announced that the southern Guangdong provincial government has entrusted it with 100 billion yuan ($15.9 billion) of local pension money, after the fund received approval from the State Council, China's cabinet.

While the pilot project is widely seen as part of a broader government effort to boost confidence in the listless stock market, it has triggered fierce debate and drawn criticism from investors and market observers. In a sign of the pressures faced by authorities, the national pension fund released a statement one day after the scheme was approved, stressing that it would invest the local pension money mainly in lower-yielding but safer fixed-income products.

"It's not accurate for some media and individuals to misinterpret 'managing local pension funds' as investing in the stock market," the state pension fund said.

Echoing the Ministry of Finance's stance, the People's Daily, the Communist Party's official mouthpiece, said Tuesday that the lingering risk of the stock market means conditions aren't ripe for pension funds to invest there.

"Pension funds are money that people use for retirement and for protecting their own lives, so the safety of funds is the top priority," the People's Daily said.