INVESTORS will be closely watching how the Guangdong pension fund fares when it becomes the first provincial retirement fund allowed to invest in the stock market.
The provincial fund, which is valued at 100 billion yuan (US$15.9 billion), will be the focus of a pilot project aimed at broadening the channels of investment so that money set aside for future elderly generations gets better returns.
Currently, provincial pension funds in China, which have an aggregate value of 2 trillion yuan, are limited to investments in state treasury bonds and cash.
The central government is expected to announce that Guangdong's pension fund will be able to invest up to 40 percent of its money in equities, possibly as soon as this quarter.
The Guangdong public fund is currently managed by the provincial government. Under the pilot scheme, the management of the fund will revert to the National Council for the Social Security Fund (NCSSF), which oversees the national pension fund and is allowed to invest up to 40 percent of its money in equities.
Some analysts said investing part of the Guangdong fund in stocks will provide a more diversified management of the money beyond just letting it sit in bank cash accounts, where yields don't keep pace with inflation.
Relative to the cost of living, "the local pension fund has lost more than 130 billion yuan in the past two years," noted Guo Chunyan, a researcher at Huatai Securities.
The average return of all provincial pension funds has been less than 2 percent a year for the last two years, while China's Consumer Price Index, a general gauge of inflation, rose 5.6 percent last year and 3.3 percent in 2010, she said.
The council's performance in equity investment has beaten the overall market. In the past nine years, the national fund's stock portfolio has yielded an average annual return of about 18 percent, compared with no increase in the key Shanghai Composite Index during that period.
The NCSSF reported an average annual return of 9.17 percent on its whole portfolio - stocks, bonds, cash and corporate investments - since the national pension fund was launched in 2000. That exceeds the return on provincial and municipal pension funds.
Loss warning
Dai Xianglong, chairman of the NCSSF and former head of China's central bank, said last week that the national pension fund has invested only about 20 percent of its portfolio in equities.
"How many stocks we will invest in depends on how the market is doing," he said.
Some analysts are leery about the idea of putting retirement funds in stocks after the poor performance of equities in recent years. They warn that people could lose their hard-earned money in volatile markets.
"It is unsuitable to put local pension funds in the stock market because there are a lot of uncertainties and risks," Zong Qinghou, board chairman of beverage giant Hangzhou Wahaha Group, said in March.
According to an online poll by Sina.com that drew 25,260 people as of Monday, about half of them said they do not support the policy of investing retirement funds in stocks.
That's where the Guangdong pension fund pilot project comes into play. It will be a bellwether for the strategy of widening investment channels. Although the inflow of new funds will certainly benefit the stock market in the short term, the question remains: Will it benefit retirees in the long run?
The public has its doubts.
"Is the decision aimed at increasing the value of the pension fund or is it a government tactic to save the stock market?" said a user on the Twitter-style Weibo.com who used the online name Leisisi.
Another Weibo user calling himself Tommywoo said he feared fund managers are the ones who will pocket the money.
Analysts are more positive.
"The recent good performance by blue chip stocks and a promising bond market provide a relatively safe market environment for investing local pension money," said a research report by fund management company UBS SDIC in March.
"After China's capital markets underwent big adjustments in 2010 and 2011, the stock market has been increasingly appealing to investors," said the report.
However, Lillian Zhu, senior analyst at Z-Ben Advisors said: "Putting the Guangdong pension money in stocks will not have a big impact on the stock market."
In the beginning, the actual investment in equities may be a conservative 10 to 20 percent, she said.
"As the stock market is not doing so well right now, the government will take it one step at a time," she noted.
Pilot may extend
If the Guangdong pilot project is successful, the more liberalized investment rules may be extended to other larger, equally wealthy provinces.
Z-Ben tipped Jiangsu, Zhejiang and Shandong - three provinces with over 100 billion yuan in pension assets - as next in line, perhaps followed by other regions and cities.
"Regulators feel the urgency to increase investment returns because 12 cities and provinces are already struggling to meet current liabilities," Z-Ben said in a March report.
Shanghai is among 12 cities with pension fund assets in the red, the report said. At the end of 2010, the latest data available, Shanghai had pension fund assets totalling only 46.2 billion yuan, less than half of those of Guangdong.
"There is a big gap in performance because provinces like Guangdong have a large population and higher incomes than the rest of the country," said Z-Ben's Zhu.
Shanghai's track record is so abysmal because the city is home to a large elderly population, she added.
Source:shanghaidaily