Xiang Huaicheng, chairman of the National Council for Social Security Fund in Beijing, says the Rmb192 billion ($23.7 billion) fund is interested in taking stakes in state-owned commercial banks such as ICBC or China Construction Bank. He also says the SSF is close to making its first investments into overseas markets.

In June 2004, the SSF made its first 'alternative investment' by taking a stake in the non-listed equity structure of Shanghai-based Bank of Communications - the first domestic institutional investor to do so. It now is BoComm's third-largest investor, behind the Ministry of Finance and HSBC.

This is part of the SSF's overall progress in its investment policies since it was established in 2000. The SSF has also invested in the country's first ETF; it is the first institution in China to mandate third-party fund houses on an account basis; it now invests in every type of product available in China. And since last year it has been allowed to help improve China's financial restructuring programme (and thus help develop the capital markets in which it must invest) by taking a stake in BoComm.

Xiang suggests not only will the SSF also repeat this with state-owned banks, but perhaps with SOEs as well, in order to improve corporate governance as well as give SOEs an alternative source of financing

But this remains just an idea. Any such deals would probably require State Council approval, and Xiang did not indicate whether the National Council for SSF is actually in talks with banks or the government for specific deals.

The SSF will also expand its portfolio investment. "The National Council for Social Security Fund will exert a good influence on the growth of the market," he says. In 2000, the SSF invested only Rmb1.9 billion, or 2.3% of its AUM, in stocks and bonds; today that stands at Rmb115 billion, or 60% of AUM. The SSF is therefore leading the development of a domestic long-term, institutional investor base, followed by insurance companies and fund management companies.

As for investing offshore - a topic, Xiang notes, that has "caught the attention of Hong Kong" - the SSF has the State Council's support, and is now looking for the optimal opportunity. Any initial investments will be modest but will grow over time. He did not indicate whether the SSF would outsource some or all of this initial allocation, but did say that SSF's lack of resources and experience meant that initially its scope of action will be limited and strictly regulated.

Addressing a conference convened by the Pacific Pensions Institute and the Asia Foundation in Beijing, Xiang gave a detailed talk on the history, role and challenges of the SSF.

Pension issues are critical to China's social stability and economic prosperity, but it is in a race against time. Since the time of SSF's establishment, the government has also expanded its pilot pensions programme in Liaoning to two other provinces, begun modest rural pension reforms and is now introducing enterprise annuities (voluntary corporate pensions). But people aged over 60 now make up 10% of the population, and those over 65 make up 7%. "This is a clear indication that China has entered an ageing society," he says. Over the coming decades, China's elderly will come to outnumber its young, with an estimated 332 million elderly by 2050, or more than half of Europe's entire population. But despite China's economic growth, per capital GDP remains about $1,000, far below Western levels.

So China's nascent pensions system faces huge challenges without having time to get established. It does not even cover the 800 million or so in the countryside who must rely on family and land. An initial reform in 1997 established a combination of pooled social security and individual accounts. But state-owned enterprises, already burdened by social insurance obligations that cost additional 40% of workers' salaries, could not meet their pension obligations, and as a result local governments had to raid funds in individual accounts.

So today there is a gap of Rmb740 billion ($91.5 billion) in individual accounts that has to be filled. The government has, since 2000, transferred around Rmb290 billion to these accounts but reforms are required to allow China to meet these massive obligations, particularly as the central government's budget cannot handle the strain.

Fortunately this gap will become evident only gradually, not at once, giving the SSF time. But the situation is severe, which is why the State Council has been very supportive of the SSF since it was set up under former premier Zhu Rongji.

One issue is to raise funds for SSF. This has been met in part by getting companies listing on overseas bourses to contribute 10% of IPO revenues. In addition, the SSF faces a long future of ongoing restructuring. In addition to the demographic pressures it faces, the SSF must operate in underdeveloped markets, and lacks the decades or centuries of experience found elsewhere. Xiang believes the long-term future looks good but is realistic about the hurdles the SSF and China must address along the way.