Market reforms

Huang Zemin, head of the International Financial Research Department of East China Normal University in Shanghai, said that reform of the capital market is a precondition for investment of the pension fund. Listed companies need to improve both the transparency of information and the delisting mechanism for those on the verge of bankruptcy, as well as reforming the procedure for IPO issuance to make it more market-oriented, said Huang.

Dai Xianglong, chairman of the NCSSF, said that the pension fund will insist that any investments should be long term, rather than simply short term and speculative. His organization manages about 800 billion yuan in social security funds, raised in part from the sale of shares in State-owned companies and also by central government grants. Over the past 10 years, its investments in equities and corporate and government bonds have realized an average annual rate of return of 9.17 percent, easily outstripping the country's average annual inflation rate of 2.14 percent over the same decade.

The pension fund can achieve a higher return from the share market than from fixed-income instruments, providing that the investment decisions are rational, Dai said.

However, Ye Tan, a noted financial columnist who writes for several news outlets, said the transparency and efficacy of the NCSSF's investment might not be easily duplicated by local pension funds, which are managed by what she refers to as a "black box system", because of the lack of transparency.

In 2006, several members of the Shanghai municipal government, including the local Party chief Chen Liangyu, were dismissed from their posts after it was discovered that roughly 3.2 billion yuan of local pension funds had been embezzled and used to finance a series of projects ranging from real estate development to roads.

"I'm afraid that those who support the move to give pension funds more access to the capital markets are not telling the whole story," said Ye. "The record of pension fund misuse at the local level makes it unclear whether investment of the fund will generate any real public benefits."

On Monday, the Ministry of Finance issued a notice reiterating a ban on local governments making any investments, direct or indirect, with pension funds, other than the purchase of government bonds or depositing the cash in savings accounts.