Charting the Course
China reviews the year gone by and sets new goals accordingly
Current Issue
· Table of Contents
· Editor's Desk
· Previous Issues
· Subscribe to Mag
Subscribe Now >>
Expert's View
Market Watch
North American Report
Government Documents
Expat's Eye
Photo Gallery
Reader's Service
Learning with
'Beijing Review'
E-mail us
RSS Feeds
PDF Edition
Reader's Letters
Make Beijing Review your homepage
Top Story
Top Story
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

Currently, the interest rate for demand deposits is 0.35 percent and the rate for one-year time deposits is 3 percent. Even in 2013, when the inflation rate was lower than the level in previous years, the 2.7-trillion-yuan pension fund was estimated to suffer losses of 17.8 billion yuan ($2.88 billion).

Huge shortfall

Fending off negative interest rates is an urgent matter for the 2.7-trillion-yuan fund, but industrial insiders believe that it remains difficult to increase the value of pension funds through investment operations.

Chu Fuling, a professor with the Central University of Finance and Economics, told Economic Information Daily that in theory, accumulation of money in the individual accounts has the features of long-term reserves, with huge demands on maintaining and increasing value. In practice, however, funds in the individual accounts are diverted to pay pensions for the already retired, leading to an enormous shortfall in these accounts.

More seriously, this deficit continued growing. By the end of 2010, only 203.9 billion yuan ($33.05 billion) in the individual accounts was payable, with a shortfall of 1.7 trillion yuan ($275.53 billion) compared with the 1.9 trillion yuan ($307.94 billion) paid in by employees to their individual accounts. The shortfall bulged to 2.2 trillion yuan ($356.56) at the end of 2011 and continued expanding to 2.6 trillion yuan ($421.39 billion) at the end of 2012.

"What is most urgent for local pension funds is not maintaining or increasing the value, but to make up for the shortfall in the individual accounts, to ensure adequate liquidity and prevent a payment crisis," Dong Dengxin, Director of the Finance and Securities Institute at Wuhan University of Science and Technology, told Economic Information Daily.

According to Dong, most of the local social security funds are now used to pay the retired, leaving only a small balance in the account. Only when the fund is sufficiently large can it be used for portfolio investment, but owing to their present size, many local pension funds are not qualified for such investment.

Where to invest

The NAO's report also reveals potential management risks for the pension funds to enter the stock market: Losses caused by irregular management and unwise decisions in regard to China's social security fund have totaled 17.5 billion yuan ($2.84 billion). From 2010 to 2013, the stock index investment operated by the NCSSF had lost $6.95 billion yuan ($1.13 billion), of which 1.47 billion ($238.25 million) was incurred in 2013. This makes it difficult for the pension fund to be invested in the stock market.

Dong said the pension funds in Guangdong Province is solely invested in fixed-income instruments, and other provinces with a large balance of pension fund could feasibly adopt the Guangdong pattern. However, he said that pension funds should be uniformly managed by the Central Government, instead of allowing various local governments to make investments wherever they choose.

"Following a conservative investment principle, pension funds can only be invested in safe fixed-income instruments and must avoid stocks," Dong said, emphasizing that investment operations entrusted to local governments by the Central Government must be transparent and regular. Only five or six provinces across the country are qualified to engage in such investment.

He thinks compared with the prospect of allowing pension funds to enter the stock market, it would be more realistic for China to develop its own version of the U.S. 401(k) retirement plan. "Supplementary pensions are really too small and need to be enlarged to divert the pressure away from the social security funds. China must further expansion of supplementary pensions," said Dong.

Email us at: wangjun@bjreview.com

   Previous   1   2  

Top Story
-Empowerment Through Infrastructure
-Special Reports: APEC China 2014
-Protection at Home
-A Weaker Union
-Will the 'China Miracle' Continue?
Related Stories
-Supporting the Bereaved
-Ensuring Full and Equal Rights
-Caring for the Elderly
Most Popular
About BEIJINGREVIEW | About beijingreview.com | Rss Feeds | Contact us | Advertising | Subscribe & Service | Make Beijing Review your homepage
Copyright Beijing Review All right reserved