Public fund companies, diversification will offset risks: experts
The Chinese government is pushing its pension fund investment scheme, which may officially start before the end of 2016. Experts cautioned on Monday that the government should see to it that the investment is safe, with measures such as entrusting the fund to domestic experienced public fund companies and choosing blue chip stocks to invest in.
Li Zhong, spokesperson for the Ministry of Human Resources and Social Security (MOHRSS), said the ministry is helping guide provincial governments in deciding on their investment quota and that some local governments have already finished making detailed pension fund investment plans.
MOHRSS is also working to formulate supporting policies, like how to evaluate fund management institutions and how to deal with risks.
"Before the end of 2016, we will guide the first batch of entrusted provinces to sign contracts with the National Council for Social Security Fund (SSF). Meanwhile, the SSF will convene a panel of judges to select the first batch of pension fund management organizations," Li said.
The State Council, China's cabinet, finalized guidelines in August allowing for pension funds to be invested in higher-return products, including stocks and equities. The guidelines restrict the proportion of those invested funds to 30 percent of total net assets, according to a report of the Xinhua News Agency in October.
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, said on Monday that on a nationwide basis, it wouldn't be easy for provincial governments to collect pension funds from their subordinate units.
"The domestic pension funds are scattered through about 2,000 units like city and county governments. Many of them do not have a large pension fund reserve pool and are still struggling to maintain a balanced budget for the pension funds. Therefore, only a few provincial governments could collect a sufficient amount of pension funds suitable for investment," he said.
According to Dong, those are mainly developed provinces in China's coastal areas like East China's Jiangsu Province and Zhejiang Province. Some of these developed areas are likely to become the vanguard of the pension fund investment reform.
According to the MOHRSS in August 2015, about 200 billion yuan ($29.5 billion) of pension funds might be collected for investment. This means that theoretically, about 60 billion yuan from the pension fund would be put into the stock market.
"But the government won't touch the 30 percent top line this time. To start with, I predict only 10 percent, about 20 billion yuan of the pension fund, will be invested in the stock market. And that is like throwing a tiny stone into the sea," Dong said.
Han Bao, a retired Shanghai resident and stock investor, is nursing hopes that the entry of the pension fund will inject life into the stagnant stock market. "I hope the fund will drive the A-share indexes up significantly," she told the Global Times Monday.
Blue chips suggested
Dong said it's important that the government has a very cautious attitude to ensure the safety of the pension fund investment.
"First of all, enough money, ready to pay the pension for at least three to five years, should be set aside. Only surplus money should be considered for investment use," he said.
Second, in choosing entrusted pension fund investment organizations, experienced public fund companies should be the top choice. Securities firms could also be considered, according to Dong.
According to a report from the Economic Observer on Sunday, a number of domestic securities firms, like Harvest Fund and China Asset Management, are busy making preparations to get a slice of the cake.
Dong said that when investing the pension fund in the stock market, blue chip stocks should be a top priority.
According to a report UBS Securities sent to the Global Times on Monday, in the future real estate and medical stocks would be some of the most favored sectors for pension fund investment.
Ni Shoubin, dean of the School of Law at Shanghai University of International Business and Economics, also told the Global Times on Monday that the investment targets should be diversified for the pension fund so as to offset potential risks.
Dong also noted that the performance of the pension fund investment should not be judged over a short period of time.
"It's important to maintain a long-term stable gain on the pension fund investment. One year's profit or loss is not that important," he said.