Large city govts eyeing equities to boost returns for welfare programs

BEIJING - China's local governments could plough up to $57 billion into the domestic stock market under a proposal, which sources familiar with the matter said was with the country's cabinet, to allow them to allocate some of their pension funds into shares.

If approved by the State Council, the move would be a welcome boost for the country's stock markets. The Shanghai exchange has lost a quarter of its value in the past 9 months and is trading 62 percent below its 2007 peak.

China's pension funds - mostly managed at the local level - have struggled to retain the value of their holdings as they can only put workers' savings in bank accounts and government bonds. That often means negative returns when adjusted for inflation.

The proposal could see 10 to 20 percent of provincial and large city pension fund assets gradually funneled into the stock market, said one of the sources. The sum is equivalent to 180 billion yuan ($29 billion) to 360 billion yuan, based on an official's estimate of pension funds held at the local level.

The percentage allowed would vary by locality, said the source, who has close ties to the government and declined to be named because of the sensitivity of the subject.

A senior financial industry executive familiar with the proposal put the likely total figure lower, at 100 to 200 billion yuan. He also declined to be named.

In December, Dai Xianglong, head of the National Council for Social Security Fund (NCSSF), said in a speech published on the fund's website that the government was considering a plan to gather together part of the pension funds managed by provinces and cities and invest some of it in stocks.

China's local pension holdings total around 1.8 trillion yuan, Dai has said. One-tenth of that would represent about 1 percent of the market value of the companies included in the Shanghai Composite Index.

The NCSSF has been publicly exploring ways to boost returns on the country's pensions, an increasingly urgent need as China's 1.35 billion population ages.

Dai has been quoted in Chinese media reports as supporting stock investment for local pension funds, and the agency already manages equity investments on behalf of some localities.

China's national pension fund declined to comment when reached by Reuters. The Ministry of Human Resources and Social Security, which regulates local pension programs, was not available for comment.

Fresh investment

It was not clear whether the money would be approved for A shares only, or whether it would also include B shares or foreign currency stocks.

On Tuesday, local Chinese media reported the NCSSF had obtained mandates from a provincial government to help manage local pension funds worth 100 billion yuan. An estimated 30 to 40 percent of that could go into the stock market, according to the report.

The NCSSF, which manages the national pension fund on behalf of the central government, already manages pension funds for Beijing and Shanghai, among others, and invests roughly one-third of its funds in stocks.

The proposal being considered would increase the number of local government pension programs that have some money invested in equity markets. Still under discussion is whether the additional funds would be managed by the NCSSF, or by some other body, said the sources.

It's unlikely the NCSSF would manage the money, said a source briefed on the matter, who added that the government would set up a new vehicle.

Policymakers worry that local pension fund managers - particularly in provinces or cities far removed from market centers - may lack the expertise to directly manage stock market investments.

Typically, when national pension funds decide to divert some of their holdings to higher-yielding investments, they contract, or hire directly, private fund managers to handle them.

Reuters