China’s pension fund has US$317 billion up its sleeve ... and now it’s shopping for overseas investments

Fund’s chairman Lou Jiwei tells Post he wants to diversify risk by looking abroad

PUBLISHED : Sunday, 22 October, 2017, 8:00pm
UPDATED : Monday, 23 October, 2017, 10:02am

China’s 2.1 trillion-yuan (US$317 billion) national pension fund is seeking more overseas investment opportunities to diversify its risks, its chairman Lou Jiwei has told the South China Morning Post.

Lou, who took up the position to manage the flagship retirement fund for the world’s second-largest economy last year, said he was aware of the risks of a high concentration of domestic assets in the fund’s portfolio.

“Putting such a large amount of assets in the China market will make the risk too concentrated and it needs diversification,” he said in an exclusive interview on the sidelines of the ongoing Communist Party congress.

“Firstly, the current proportion is far shy of the government-approved cap and, secondly, it’s for the sake of risk diversification,” the 67-year-old said.

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The overseas portfolio of the fund, mainly stocks and bonds, only accounted for 10 per cent of the total, while the government cap was set at 20 per cent, Lou said.

The National Social Security Fund’s annual report last year said its overseas investments had reached 136 billion yuan, 6.7 per cent of its total investible assets.

He said the NSSF would look for more investments overseas but only if returns proved promising.

He admitted that the fund was keen to invest more in alternative markets, but was short of staff with the relevant experience.

The NSSF has reported significant investment gains since its establishment in 2000. Its annualised return reached 8.4 per cent, including 15.2 per cent when the stock market rout wiped off trillions of wealth from retail and institutional investors. However, last year it registered a gain of just 1.73 per cent.

Although the fund seldom reveals details of its investment strategies, it is known for its cautious investment style, as it holds the retirement savings of hundreds of millions of people.

The fund is likely to remain cautious even though it has already indicated that it will hop on the bandwagon of President Xi Jinping’s ambitious “Belt and Road Initiative”, which will affect the economies of more than 60 countries in Asia, African and Europe.

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Lou said that its choices of overseas investment would depend on specific projects, rather than having any preference for particular countries.

“We have only one goal, that is to achieve a high risk-adjusted, long-term return and ensure the appreciation of the social security fund,” he said.

He also said the countries’ currency rates would be a key criteria because many commodity-based economies could be significantly affected by fluctuations in their value against the US dollar.

However, he said he thought that the yuan’s exchange rate against the dollar “will be basically stable, although there will be certain fluctuations”.

He added: “We are not particularly concerned about the exchange rate.

“Investment is very complicated. Some countries are commodity-exporting countries. If you invest in them, it is equivalent to investment in crude oil. Its exchange rate and stocks usually change in line with the oil price.”

However, he said such investments might be necessary from a long-term perspective.

“Look at Russia, how big its currency swing is … But if you can endure that [over the long term], it’s OK. Now, the rouble has appreciated [a lot],”he said.

More generally, Lou also expressed confidence over the Chinese economy’s future direction.

“China is a big economy, with huge population and strong domestic demand. It’s not a big problem,” he said.

Unlike some commodity-exporting countries like Australia, which relied on Chinese and American investment to boost its economy, the vast majority of economic growth had come from domestic demand, Lou said.

“No matter what happens externally, we are not afraid, “Lou said.

Lou, who stepped down as finance minister last year, has long been seen as a reformer influenced by the renowned economist Wu Jinglian.

He helped move the country’s economy in a free market direction in the 1980s, working with other reformist officials such as Zhou Xiaochuan, the governor of the People’s Bank of China who is expected to retire soon, and Guo Shuqing, the chairman of China Banking Regulatory Commission who is believed to be Zhou’s likely successor.

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His new task is to coordinate efforts to fill the financial black hole caused by the fact that people did not have to pay into the pension fund before 1997 but were still entitled to a pension.

The country approved a national mechanism for pension payments after six provinces reported a shortfall in 2015, with more expected to face similar problems in future.

Transferring state assets to the national fund was discussed in a reform document four years ago, but only Shandong has done so by transferring a 30 per cent stake of the provincial government’s assets to its social security pool.

The central government was ready to coordinate pension payments at a national level amid increasing imbalances across the provinces, Lou said.

However, he warned that depending on a state assets transfer or the national social security fund to solve the problem was unrealistic.

“It is not responsible to increase the deficit and let the future generation repay it. It [a deficit added to general expenditure] is also forbidden by law.”

Instead he said the cost had to be shared by the government, and current and future generations.