China: Supporting Pension Funds and Markets

Published on April 1, 2016

The third session of the Fifth National Council for the Social Security Fund was held in Beijing on March 25, at which a number of measures were approved by China’s State Council, led by Premier Li Keqiang, to guide the National Social Security Fund’s investment strategy for 2016.

*** Among the most important measures approved by the State Council was an authorization allowing the 1.9 trillion Yuan as of the end of 2015 NSSF to invest 35-40% of newly added assets into China’s domestic stock market in 2016. The State Council also approved plans for the manager of the National Social Security Fund to manage pension funds worth about 2.2 trillion yuan for provincial governments. ***

*** Under new rules, up to 30% of these provincial government pension funds can now be invested in stocks, equity funds and balanced funds. All told, it should translate into an estimated 650 billion yuan investment of provincial pension funds in the Chinese domestic stock market this year. ***

The rest of these provincial pension funds can be invested in domestic convertible bonds, money-market instruments, asset-backed securities, index futures, and bond futures, as well as in major infrastructure projects. The State Council also approved the granting of preferential tax treatment for provincial pension investments. These new rules will take effect on May 1.

And a Few Other Key Measures

In addition, the State Council approved a handful of other key measures, among them, allowing the NSSF to lift the cap on ownership of corporate debt and regional government bonds from 10% to 20% in 2016, and to invest about 10% of its new investments in the interbank market in 2016.

The State Council will also increase the amount the fund is allowed to invest directly in the subsidiaries of state-owned firms or some leading privately owned enterprises from 5% to 10% in 2016, and it will increase the amount the fund is allowed to invest in city infrastructure and public housing projects, from 5% to 10%, in 2016.

Support for Markets

Estimates are that about 650 billion yuan of provincial pension funds will be invested in the Chinese domestic stock market this year.

That investment plan is expected by officials to not only benefit the stock market but to benefit the returns for the funds themselves as well, given that, despite the added volatility, returns from investing in stocks have been generally higher than those from treasury bonds or interest earned from bank accounts.

Indeed, officials point to the cumulative investment return of 17.3 billion yuan the National Fund has achieved on about 100 billion yuan it has been managing for Guangdong province since 2012. And according to the NSSF’s report, despite the intense volatility in Chinese equity markets, the National Social Security Fund posted its best investment return last year in six years.

The NSSF is reported to have earned a net profit of 228.7 billion yuan, or a 15.16% return, from all investment sectors in 2015, up from 11.4% in 2014, despite downward pressure on the economy.

Even more to the point, officials are pleased the fund earned an 18.7% investment return from investing in the domestic stock market despite the market having suffered a heavy slump in the early summer. The fund’s 18.7% net profit in the stock market is almost double that of the Shanghai Composite Index, which gained 9.4% last year. It seems official buying of dips in support of markets can be a winning strategy after all.

Compared with past years, the NSSF posted an 11.43% return on investments in 2014, 6.2% in 2013, 7% in 2012, 5.6% in 2011, 4.2% in 2010 and 16.1% in 2009. The average annual return of 8.82% has beaten inflation by 6.5% since the fund’s inception in 2000.

And the NSSF assets have ballooned in the process.

Back in 2000, the fund started with 20 billion yuan. The assets of the fund are sourced mainly from the central government budget, state-owned capital, the state lottery, and the fund’s investment returns.

By the end of 2015, the Fund was managing assets totaling 1.9 trillion yuan, up from 1.5 trillion yuan the year before. To put that in context, as of today, the country’s A-share markets’ combined value is estimated to total around 45 trillion yuan.

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