Stock investment by pension funds proposed

New measures including lotteries are being introduced to top up the deficit-ridden pension system in China.

Gambling and stock investment: the former seems to be a safer bet for the Chinese government to boost its pension coffers than investing.

From 6 October, once a week for 15 weeks, mainlanders will be able to buy the hope of winning Rmb1 million ($120,000) in prize money from banks and shops selling lottery tickets, a capital idea whipped up by the government to help pay the 600,000 pensioners and 700,000 unemployed who last year officially did not receive benefits because of the lack of funds.

The Rmb7 billion pension deficit, a figure released by the State Council's Development Research Centre this year, is the result of default payments, fund-siphoning as well as dismal investment returns. On the last item, at least, some hard decisions are about to be made. Li Jiange, vice-director of the State Council's Economic Restructuring Centre, has told local media this week that "two or three" open-end funds should be established for pension funds to invest in, with a management fee substantially lower than the current levels for closed-end funds.

Pensive pension funds

The idea of allowing stock investment by pension funds has been floating around for some time. But apart from the signing of an agreement between the Ministry of Labour and Social Security and the Beijing-based Boshi Fund Management to study the pros and cons of stock investment by pension funds, the proposal has not gained major official support in public until now.

Li says if the current tight control on investment remains, the growth of both the pension and stock markets will suffer. He suggests pension funds could adopt the newly reformed insurance funds model, investing between 10% and 15% of their portfolio into the market, with index futures trading introduced for risk hedging.

Chinese analysts predict as much as Rmb100 million could be poured into the stock market if pension funds are allowed to enter the market, increasing both liquidity and the funds returns.

The news of the government's plan to launch a national benchmark index this week also will make a fund manager's job easier. Anthony Neoh, chief advisor to China Securities Regulatory Committee, told a mainland paper yesterday that between 200 and 300 companies listed on the Shanghai and Shenzhen boards will anchor the new index, to be managed by an independent institution. Index-related investment products will also be approved.

Hong Kong example

State Street Global Advisors, the manager of Hong Kong's tracker fund, an index fund launched by the Hong Kong government, has been frequently approached in the past few months by mainland officials wanting to introduce similar funds to China, according to the company's managing director, Vincent Duhamel.

Duhamel  says while most officials understand the support system necessary for running a tracker fund, there are bureaucracies to be grappled with first. He predicts it will take at least two years to be ready for a fund similar to Hong Kong's.

Meanwhile, there are lottery tickets for investors to turn to in the next three months.

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