Exclusive: China Eyes Pension Fund Boost for Stock Market

By Benjamin Kang Lim and Don Durfee, Reuters

January 19, 2012

  China

China's local governments could plough up to $57 billion into the domestic stock market under a proposal, which sources familiar with the matter said was with the cabinet, to allow them to allocate some of their pension funds into shares.

If approved by the State Council, the move would be a welcome boost for the country's stock markets. The Shanghai exchange .SSEC has lost a quarter of its value in the past 9 months and is trading 62 percent below its 2007 peak.

China's pension funds - mostly managed at the local level - have struggled to retain the value of their holdings as they can only put workers' savings in bank accounts and government bonds. That often means negative returns when adjusted for inflation.

The proposal could see 10-20 percent of provincial and large city pension fund assets gradually funneled into the stock market, said one of the sources, equivalent to 180-360 billion yuan ($29-$57 billion), based on an official's estimate of pension funds held at the local level.

The percentage allowed would vary by locality, said the source, who has close ties to the government and declined to be named because of the sensitivity of the subject.

A senior financial industry executive familiar with the proposal put the likely total figure lower, at 100-200 billion yuan. He also declined to be named.

In December, Dai Xianglong, head of the National Social Security Fund (NSSF), said in a speech published on the fund's website that the government was considering a plan to gather together part of the pension funds managed by provinces and cities and invest some of that in stocks.

China's local pension holdings total around 1.8 trillion yuan, Dai has said. A tenth of that would represent about 1 percent of the market value of the companies included in the Shanghai Composite Index.

The NSSF has been publicly exploring ways to boost returns on the country's pensions, an increasingly urgent need as China's 1.35 billion population ages.

Dai has been quoted in Chinese media reports as supporting stock investment for local pension funds, and the agency already manages equity investments on behalf of some localities.

China's national pension fund declined comment when reached by Reuters. The Ministry of Human Resources and Social Security, which regulates local pension schemes, was not available for comment.

FRESH INVESTMENT
It was not clear whether the money would be approved for A-share stocks only, or whether it would also include B-share, or foreign currency stocks.

On Tuesday, local Chinese media reported the NSSF had obtained mandates from a provincial government to help manage 100 billion yuan worth of local pension funds. An estimated 30-40 percent of that could go into the stock market, according to the report.

The NSSF, which manages the national pension fund on behalf of the central government, already manages pension funds for Beijing and Shanghai, among others, and invests roughly a third of its funds in stocks.

The proposal being considered would increase the number of local government pension schemes that have some money invested in equity markets. Still under discussion is whether the additional funds would be managed by the NSSF, or by some other body, said the sources.

It's unlikely the NSSF would manage the money, said a source briefed on the matter, who added that the government would set up a new vehicle.

Policy makers worry that local pension fund managers - particularly in provinces or cities far removed from market centers - may lack the expertise to directly manage stock market investments.

Typically, when national pension funds decide to divert some of their holdings to higher-yielding investments, they contract, or hire directly, private fund managers to handle them.

($1 = 6.3150 Chinese yuan)