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In the News

Should the Pension Fund be Invested in the Capital Market?

Ahead of this year's two sessions, Zhao Qizheng, spokesman for the annual session of the National Committee of the Chinese People's Political Consultative Conference, or the CPPCC, pointed out that China faces a serious issue of getting old before it gets rich.

"Normally, countries become aging societies after their per capita GDP reaches ten thousand US dollars. In China, our per capita GDP is only 3000 dollars at the moment; however, China is already an aging society. I think this calls for serious attention from the government and society."

The amount of people aged 60 or above in China hit 185 million by the end of 2011, or 13.7 percent of the nation's total population.

Meanwhile, about 2 trillion yuan, or 317 billion US dollars worth of pension funds lay scattered across the nation, sitting in low-yield financial instruments; shrinking day by day due to negative interest rates caused by stubbornly high inflation.

China's securities regulator is currently studying a plan which would see pension funds invested in China's capital market in an effort to better manage the pensions and help lift the market as a whole.

During a group discussion within the CPPCC, Chairman and President of the Export-Import Bank of China, Li Ruogu, told reporters he supports the notion of investing pension funds in the capital market.

"This is very common practice in other countries; the key is supervision. I think there's no hurdle in investing pension funds in the capital market. But there should be restrictions on the investment proportion and products. If losses were made, pensioners are going to greatly affected."

As a major component of China's capital market, the stock markets saw big losses in 2011- the shanghai composite posted a near-zero growth compared with ten years ago.

Given the fact that stock markets in China are still 'immature,' national advisor Liu Kegu suggests that pension funds should not be invested in stocks.

"An investor's purpose is to make profit. First, the market should be able to provide a long-term stable profit with a relatively high probability. The profit can be very small but it definitely shouldn't amount to long-term losses. Secondly, in theory, the long-term average return on capital should at least be higher than the rate of return for savings. If you cannot guarantee this, pension funds, upon which society will depend on in the future, should not be allowed to enter the market."

The former vice governor of China Development Bank also points out that the larger the fund is, the more difficult it will be for it to avoid risks; hence the smaller the chance to maintain high and stable returns. Therefore, it is important to start off by investing a small portion and be aware of any changes in quantity.

Web link: http://english.cri.cn/6826/2012/03/06/2702s685267.htm


China capital market reforms

Chinese premier Wen Jiabao on Monday backed efforts by Guo Shuqing, the recently appointed head of the China Securities Regulatory Commission, to overhaul the nation's financial markets, an important endorsement in a country where the appetite for serious reform has retreated in recent years.

Speaking before the National People's Congress, China's lawmaking body, in Beijing, Wen promised to “improve both initial public offering and delistings, and ensure better protection of returns on investors' money and their rights and interests".

Guo, a former chairman of China Construction Bank who took over as head of China’s securities regulator last October, has started laying out a blueprint for changes aimed at cutting red tape and allowing China's bond and equity markets to work more efficiently and help provide capital for small, entrepreneurial firms that have long struggled to raise loans from banks.

He has floated some ideas, including reducing the CSRC’s role in approving IPOs, letting China's local pensions funds invest in stocks, and calling for research into allowing small private companies to issue high-yield bonds. On Monday, Guo told reporters that China will "quickly" launch a high-yield bond market.

Web link: http://www.efinancialnews.com/digest/2012-03-06/chinese-premier-backs-regulator-for-capital-market-reforms

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© Lehman, Lee & Xu 2012.
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