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UPDATED: January 3, 2015 NO. 29 July 17, 2014
The Pension Conundrum
Investment channels should be diversified to prevent depreciation of China's pension funds
By Wang Jun


According to an auditing report on the national social security fund released by the National Audit Office (NAO), the 2.7-trillion-yuan ($437.6-billion) pension fund suffered losses of 17.8 billion yuan ($2.88 billion) in 2013 because of negative interest rates.

Analysts think it is particularly important to maintain and increase the value of the fund through investment and prevent a payment crisis. The government should diversify risks in the pension system.

Devaluation risks

According to statistics released by the Ministry of Human Resources and Social Security (MHRSS) on June 24, by the end of 2013, the assets of the national basic pension insurance fund for urban workers had reached 2.99 trillion yuan ($484.6 billion). Meanwhile, the assets of the national basic pension insurance fund for non-working urban residents totaled 312.4 billion yuan ($50.63 billion) by the end of 2013. Combining the basic pension insurance funds for all urban residents, at least 2.7 trillion yuan ($437.6 billion) in pension funds was standing idle at the end of last year.

The enormous idle pension funds could be likened to a huge apple pie cooling on the windowsill, tempting both the supervising authority and institutional investors.

Wang Zhongmin, Vice Chairman of the National Council for Social Security Fund (NCSSF), said at a conference held on June 16 that the balance of the country's pension insurance fund had surpassed 3 trillion yuan ($486.22 billion), and if the managing authority puts some of the fund into investment channels instead of putting the majority of the money in banks and treasury bonds, it will greatly increase capital flow in the market and bring huge changes to fund investment.

According to an annual report released by the NCSSF on June 30, in 2013, the country's social security fund gained 68.6 billion yuan ($11.12 billion), with an investment return rate of 6.2 percent, and the assets managed by the council had totaled 1.24 trillion yuan ($200.97 billion). The investment return rate was higher than the inflation rate of 2.6 percent in the same period, said the NCSSF.

The China Securities Regulatory Commission (CSRC) announced on June 13 that it will continue cooperation with the MHRSS and the Ministry of Housing and Urban- Development, in advancing market-oriented operations of basic pension funds and housing provident funds, encouraging the investment fund management industry to participate in the designing of a market-oriented pension fund system.

Earlier this year, the CSRC said it was accelerating the process of allowing long-term funds, including pension funds, insurance funds, and housing provident funds, as well as capital from Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor programs, to enter the stock market.

However, according to a requirement stipulated by the Ministry of Finance, the fiscal departments of local governments are not allowed to make direct or indirect investment other than time deposits or purchasing treasury bonds with the surplus of social security funds. In fact, most of the local social security funds are deposited in banks, and only a small proportion is invested in treasury bonds.

Zheng Bingwen, Director of the Center of International Social Security Studies at the Chinese Academy of Social Sciences, said because of this investment strategy, the average investment return rate for pension funds was lower than 2 percent over the past decade. Deducting the inflation rate, the average annual return rate was negative, carrying a risk of depreciation.

According to a NAO report in August 2012, among the total balance of social security funds, demand deposits and time deposits accounted for 38.44 percent and 58.01 percent respectively, with other forms of investment only accounting for a paltry 3.55 percent.

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