Pension Fund Liberalization Needed

China’s pension funds should be allowed to enter the stock market, an official report said Thursday. This would bring bigger gains for deficit-stricken pension funds and nurture the growth of institutional investors.

The report, jointly released by the Ministry of Labor and Social Security and Boshi Fund Management Co. Thursday in Beijing, suggested that as much as 15 percent of pension funds could be invested in stocks.

Investment in treasury bonds and corporate bonds could each account for another 5 percent. There could be more investment products for pension funds in the future, including investment in property and overseas financial markets, though markets are not yet ready, the report said.

The package of suggestions will be an important reference point for the government when designing new policies to better manage pension funds, said Vice-Minister of Labor Wang Dongjin, though no exact timetable was given for the reforms.

The changes are part of efforts by the Chinese government to commercialize the management of pension funds, which cover more than 100 million Chinese people. Recently, they have faced increasing deficits and limited incomes because of regulatory restrictions.

A pilot program is going on in northeast China’s Liaoning Province to test new ways to handle pension funds. Managed by provincial governments, the country’s pension funds are still limited to investments in bank deposits and state bonds. Stock investment is forbidden.

The sector reported a staggering 35.7 billion yuan (US$4.3 billion) deficit last year causing payment difficulties, the report said.

To ensure bigger returns and better management of funds, the government should broaden investment channels, said He Ping, an official from the ministry who is in charge of pension fund research.

A number of qualified fund and asset management companies, not local governments, should be invited to manage pension funds and design their investment portfolios, which should include stocks.

Sino-foreign fund management companies, which are expected to be established in China soon as part of the country’s WTO commitments, may also get involved.

“The stock market is well prepared for pension fund entry,” said Zhou Zhidao, chairman of Beijing-based Boshi Fund Management.

More transparent information disclosure, sounder market regulations and rapid growth of institutional investors all pave the way for reforms, said Zhou.

The reforms, which are being seriously considered by the central government, are expected to bring up to 160 billion yuan (US$19 billion) of pension funds into the financial markets.

Even conservative calculations put that figure at 40 billion yuan (US$4.8 billion), the report said.

However, an investment risk compensation mechanism should also be established to guarantee minimum investment returns, experts said.

There should also be a strict market entry system for fund managers, who should undergo supervision from the government and the public to ensure appropriate management of funds.

(China Daily 05/25/2001)

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