Low ROE could hurt China's funding of its pension deficit

China''s pension funds will find it difficult to get sufficient returns from existing mainland-listed companies.
China has a problem. It has massive pension liabilities, estimated at 60-80% of GDP, or $600-800 billion, and listed state owned enterprises which show a dismal return on equity ROE. The interim results of Chinese listed companies showed ROE of just 4.1% this year, down from 5% at the same point last year, according to research from emerging markets investment bank CLSA.

To provide for our liabilities, we would typically look at an investment yield of around 10% per year, commented Ron Otsuki, CEO of insurance giant Manulife Funds Direct, Hong Kong.

ROE is not the same as investment yield as it is backward looking, whereas investment yield, based on the...

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