China has initiated an ambitious plan to shift stakes in state-owned enterprises (SOE) to its national and a set of province-run pension asset managers, in an attempt to plug shortfalls in the country’s public retirement system.
The bold strategy could lead to new divisions and potentially offer new mandates to domestically owned fund houses, according to market experts.
Beijing intends to begin by transferring stakes in selected SOEs to the National Council for Social Security Fund (NCSSF), the state-owned pension asset manager. This step is designed to strengthen the sustainability of China’s retirement benefits system, as it will pump more assets into the underfunded system while simultaneously diversifying the capital structure of SOEs, the State Council said in an announcement on November 18.
The NCSSF will first receive returns in the form of dividends, according to the announcement. However, it did not specify a time-frame for when the proceeds will be contributed to state benefits or how exactly much in assets will be transferred.
The document did note that NCSSF may set up new entities specifically for managing pension fund assets after obtaining regulatory approval. The state pension operator could choose to use the asset injection to offer new mandates to external local fund managers, and they should not face stringent restrictions on what asset classes to invest in, Wu Haichuan, head of retirement business at Willis Towers Watson, told AsianInvestor.
He declined to be more specific on the possible criteria the state fund could use to pick fund houses, but said that it's unlikely the asset shifts will benefit any large asset management companies with foreign ownership.
Organisations that manage state-owned assets in China are required to be state-owned, However, most of the country’s big asset managers are partly owned by foreign shareholders, he noted.
“It’s [Beijing is] transferring state-owned capital to another state-owned [entity]. The country is placing money from one pocket to another pocket. Not every asset manager can do this [manage the transferred shares], as it must be wholly-owned by the country,” Wu said.
For example, Harvest Fund Management, the eighth largest asset manager in China, will definitely not be in the list because part of its stakes is owned by a foreign company, he said. Deutsche Bank’s asset management arm has had a 30% stake in Harvest since 2008.
SOE asset transfer
The initial stage of the SOE asset transfer is set to take place over the coming 12 months.
In the first stage up to seven central government-owned SOEs, two of which are financial institutions, will have to transfer 10% of their equity (a uniformed percentage) to the NCSSF by the end of this year. The plan will be expanded to include more SOEs next year.
In addition, local government-owned SOEs will have to transfer their required capital to asset managers set up by the local governments (not the NCSSF). Several provinces will soon be named to as the pioneers in this plan.
The document noted that SOEs focused upon public welfare and cultural purposes will be excluded from the transfer, as will financial institutions that are meant to be engines for achieving the country’s economic goals, such as its three policy banks.
SOEs that are monopolies and are the most profitable are tipped to be first ones to be included. This could include its telecommunications companies China Mobile and China Telecom, and oil giants such as PetroChina, Sinopec and Cnooc. State-owned banks could also be included in the two initial financial institutions, said Wu.
“SOEs with better profit levels will go first. It is because they will surrender equity stakes and not money….Equity dividends will depend on profits,” he said.
The amounts that could be transferred would be substantial if 10% stakes in some of these companies were included. China Telecom Corp., the Hong Kong-listed state company, boasted a market capitalisation of HK$307.5 billion ($39.37 billion) on Tuesday (November 21), while PetroChina’s market cap was Rmb1.42 trillion ($214.25 billion) and Industrial and Commercial Bank of China’s was Rmb2.11 trillion.
Filling the hole
China’s retirement system needs the money these SOEs can provide.
Like most countries, its pension system is made up of three pillars. The first consists of state benefits, or the social security system. The second pillar is one in which employers help employees save for retirement, while the third pillar is built from personal savings and voluntary individual contributions to pension plans.
The comprehensive social security system, which is funded by social security contributions, is implemented on a provincial level, with people in different provinces receiving different amounts depending on the wage levels in that province. However, a gap has emerged between the amount of contributions collected to support retirement pensions and the amount that needs to be paid, partly because wage levels have quickly risen over the past 20 years.
Added to this, China’s population is aging fast, adding to the shortfall in the first pillar, Wu said. While there were roughly 7.6 workers for every retiree in 2016, this is expected to fall to 2.1 workers per retiree by 2050.
There is no official data available on the size of the funding gap for the country’s pension system, Stuart Leckie, a Hong Kong-based independent specialist who has advised China on its pension system, projected the hole to expand to Rmb1.2 trillion by 2019, Bloomberg reported in June.
Compared to this, China’s Public Pension Fund (PPF), which is based on compulsory direct contributions from individuals, has approximately Rmb360 billion ($52 billion) in assets under management (AUM). Meanwhile the National Social Security Fund, a reserve pension fund run by the NCSSF, has AUM of Rmb1.9 trillion.
A lot more money will be needed in the coming decades, and Beijing evidently believes that tapping its SOE assets are a good beginning to help its underfunded first pillar pension funds keep up with its fast-retiring populace.
“The government is responsible for ensuring social security payments under the first pillar. There is now a gap, the government must have to pay for it. And now it is taking the money from SOEs,” said Wu.
The asset managers poised to receive largesse from the SOEs are not likely to be major players when it comes to the operations of these state players. Fund managers that end up with SOE shares will only manage the transferred capital and will be barred from interfering with the day-to-day operations of the SOEs and in most cases unable to sit on the board of directors, according to the plan.
Asset managers’ eyes on third pillar
While much of China’s domestic asset management business won’t directly benefit from asset injections into the first pillar, they should benefit from efforts to develop its third pillar.
Beijing is keen to encourage the populace to voluntarily set aside savings for their retired lives through investing in funds of funds. The China Securities Regulatory Commission (CSRC), the country’s securities regulator, started consulting the public early this month about the standards and rules on pension products for average investors. As a result of this, retirement savings are expected to flow from bank deposits to the mutual fund industry, AsianInvestor has reported.
Harvest Fund Management, a local fund house, told AsianInvestor that it believed the new rules will benefit the development of fund of funds in the short run, and that it is researching the types of target date funds and target risk funds mentioned in the consultation paper.